Many individual and institutional investors search for alternative investment opportunities when there’s a disappointing outlook for U.S. Equity markets.
As financiers try to diversify into different asset sectors, mostly hedge funds, many are turning to managed futures as a solution. But instructional material on this alternative investment vehicle is not yet easy to find.
So here we offer a helpful ( kind of due diligence ) primer on the topic, getting investors started with asking the most relevant questions. The term “managed futures” is about a 30-year-old industry made from pro money managers called “Commodity Trading Advisors” ( CTAs ). CTAs must register with the U.S. Government’s Commodity Futures Trading Commission ( CFTC ) before they can offer themselves to the general public as money managers. CTAs also need to go thru an FBI deep background check, and supply comprehensive notification documents ( and independent audits of finance statements each year ), which the National Futures Association ( NFA ), a self-regulatory watchdog organization reviews.
CTAs often manage their customer’s assets employing an exclusive trading program or a discretionary strategy, which will involve going long or short in futures contracts in areas like metals, grains, equity indexes, soft commodities and foreign currency and U.S bond futures. During the past few years, cash invested in managed futures has more than doubled and will likely keep growing in the approaching years if hedge funds returns flatten and stocks underperform.
A key debate for expanding into managed futures is their potential to lower portfolio risk.
Supporting such a discussion are many educational studies of the results of mixing standard asset groups with alternative investments like managed futures. Dr John Lintner of Harvard University is maybe the most cited for his research in this area. Taken like an alternative investment class alone, the managed futures class has produced comparable returns in the decade before 2005. As an example, between 1993 and 2002, managed futures had a compound average yearly return of 6.9%, while for U.S. Stocks ( based mostly on the SP 500 total return index ) the return was 9.3% and 9.5% for U.S. Treasury bonds ( based mainly on the Lehman Bros long term Treasury bond index ). Re risk-adjusted returns, managed futures had the smaller drawdown ( a term CTAs use to refer to the maximum peak-to-valley drop in a shares ‘ performance history ) among the 3 groups between Jan 1980 and May 2003. In this period managed futures had a -15.7% maximum drawdown while the Nasdaq had one of -75% and the SP 500 stock index had one of -44.7%.
A further advantage of managed futures includes cutting risk thru portfolio diversification by negative relationship between asset groups. As an asset sector, managed futures programs are inversely related with bond certificates and stocks. For instance, during times of inflationary pressure, making an investment in managed futures programs that track the metals markets ( like silver and gold ) or foreign currency futures can supply a valuable hedge to the damage such an environment can have on stocks and bonds. To explain, if bonds and stocks underperform because of rising inflation concerns, some managed futures programs might outperform in these same market conditions. So, mixing managed futures with these other asset groups may get the most out of your allocation of investing capital.
Commodity trading carries risks and is not suitable for all investors. Past performance is not indicative of future performance.
Originally introduced in 1975, managed futures hedge funds use futures, forwards, and options to get access to the commodity, currency, interest rate, and equity markets. A futures contract is a contract to buy or sell an asset at a particular price at a later time.
When creating a contract position, a trader must post a performance bond, also known as margin, to cover likely losses on the position. As costs change across the life of a futures contract, the trading accounts where performance bonds are held are debited and credited accordingly. Profits are made when the market or spot cost of a commodity surpasses the futures’ price. Extra returns can be made when traders replenish or roll contracts and the sale cost of the old contract surpasses the price of buying the new contract. Interest earned on margin posted in the trading account also makes a contribution to returns.
In 2008, when US and world instruments dropped 38% and 45 percent, respectively, managed futures were up 14%. Managed futures provided robust, uncorrelated returns to normal asset groups that suffered in this period. Establishments and high value people took note, boosting total investment in managed futures to its current level of over $200 bill in assets under management.
Managed futures trading provides a source of liquid return often not linked to other investment classes. This was obviously seen in 2008, when many stockholders thought they’d achieved satisfactory diversification with their investments in long / short equity and event-driven hedge fund secrets, or other possible choices like high-yield debt and real-estate. It seemed of these investments were highly related to Standard & Poor’s five hundred stock index, and financiers found their alternative investments falling in lockstep with their standard investments.
One of the most significant lessons learned during 2008 was that portfolio diversification does not come from the quantity of managers or positions in a portfolio. Diversification comes from building a portfolio of essentially different return streams and managed futures offer various drivers of positive and negative returns.
Managed futures are one of the few alternative investments that have nil or negative link to the equity markets. Since their establishment in the 1970s, managed futures have frequently produced non-correlated returns during periods of stock exchange dislocation. Dr. John Lintner of Harvard Varsity , one of the co-creators of the Capital Asset Pricing Model, first released his seminal work on managed futures in 1983. He concluded that portfolios composed of equity and fixed earnings investments exhibit significantly less variance at each possible level of predicted return when mixed with managed futures. As illustrated in the chart above, Linter’s work remains as current today as it was in 1983. Adding even a bit of managed futures, as represented by the BTOP fifty Index, to a normal portfolio of shares and bonds has offered better returns at lower risk over a twenty year period one which has included Black Monday ( 1987 ), the 1st Gulf War ( 1990 ), long-term Capital Management / Russian debt default ( 1998 ), terrorist attacks on the World Trade Center and Pentagon ( 2001 ), and the up to date liquidity crisis ( starting 2007 ).
Commodity trading carries risks and is not suitable for all investors. Past performance is not indicative of future performance.
Many individual and institutional investors search for alternative investment opportunities when there’s a disappointing outlook for U.S. Equity markets.
As financiers try to diversify into different asset sectors, mostly hedge funds, many are turning to managed futures funds as a solution. But instructional material on this alternative investment vehicle is not yet easy to find.
So here we offer a helpful ( kind of due diligence ) primer on the topic, getting investors started with asking the most relevant questions. The term “managed futures” is about a 30-year-old industry made from pro money managers called “Commodity Trading Advisors” ( CTAs ). CTAs must register with the U.S. Government’s Commodity Futures Trading Commission ( CFTC ) before they can offer themselves to the general public as money managers. CTAs also need to go thru an FBI deep background check, and supply comprehensive notification documents ( and independent audits of finance statements each year ), which the National Futures Association ( NFA ), a self-regulatory watchdog organization reviews.
CTAs often manage their customer’s assets employing an exclusive trading program or a discretionary strategy, which will involve going long or short in futures contracts in areas like metals, grains, equity indexes, soft commodities and foreign currency and U.S bond futures. During the past few years, cash invested in managed futures has more than doubled and will likely keep growing in the approaching years if hedge funds returns flatten and stocks underperform.
A key debate for expanding into managed futures is their potential to lower portfolio risk.
Supporting such a discussion are many educational studies of the results of mixing standard asset groups with alternative investments like managed futures. Dr John Lintner of Harvard University is maybe the most cited for his research in this area. Taken like an alternative investment class alone, the managed-futures class has produced comparable returns in the decade before 2005. As an example, between 1993 and 2002, managed futures had a compound average yearly return of 6.9%, while for U.S. Stocks ( based mostly on the SP 500 total return index ) the return was 9.3% and 9.5% for U.S. Treasury bonds ( based mainly on the Lehman Bros long term Treasury bond index ). Re risk-adjusted returns, managed futures had the smaller drawdown ( a term CTAs use to refer to the maximum peak-to-valley drop in a shares ‘ performance history ) among the 3 groups between Jan 1980 and May 2003. In this period managed futures had a -15.7% maximum drawdown while the Nasdaq had one of -75% and the SP 500 stock index had one of -44.7%.
A further advantage of managed futures includes cutting risk thru portfolio diversification by negative relationship between asset groups. As an asset sector, managed futures programs are inversely related with bond certificates and stocks. For instance, during times of inflationary pressure, making an investment in managed futures programs that track the metals markets ( like silver and gold ) or foreign currency futures can supply a valuable hedge to the damage such an environment can have on stocks and bonds. To explain, if bonds and stocks underperform because of rising inflation concerns, some managed futures programs might outperform in these same market conditions. So, mixing managed futures with these other asset groups may get the most out of your allocation of investing capital.
Commodity trading carries risks and is not suitable for all investors. Past performance is not indicative of future performance.
The term “hedge fund” goes back to only 1949. In 1949, pretty much all investment methodologies took only long positions. A reporter for Fortune mag, named Alfred Winslow Jones, broadcast an article indicating that financiers could achieve larger returns if hedging were implemented into an investment technique. This was the start of the Jones model of investing. To prove his theory, Jones launched an investment partnership incorporating two investment tools into the technique : short selling and leverage. The goal of these 2 secrets was to restrict risk and augment returns at the same time. Additionally, Jones established 2 important traits that are still part of the industry today. He used a motivation charge of twenty percent of profits and he kept the majority of his own private money in the fund. This made sure that his private goals and the goals of his speculators were in alignment.
Phenomenal results were got thru this hedged approach.
In the period from 1962 to 1966, Jones outperformed the top retirement fund by more than 85 percent, net of costs.
The success of Jones excited the interest of high asset value people in hedge funds. Not only did Jones attract the interest of high asset value people to hedge funds, but also many top money chiefs were drawn to hedge fund thanks to the unique charge structure. A twenty percent motivation charge made it straightforward for bosses to earn 10-20 times as much in compensation compared to long-only cash management services. Between 1966 and 1968, almost 140 new hedge funds were launched in consequence of the new dynamics of investing and handling money. Many of those funds nonetheless, didn’t follow the Jones model of hedging risk.
Rather than hedging, only leverage was used to improve returns, ignoring the short-selling aspect that Jones employed. Employing a leveraged, long-only technique made these funds highly subject to the market recession that started in late 1968.
Some hedge funds dropped in price by over seventy percent inside two years. Large hedge fund losses because of the 1973-1974 bear market caused many speculators to turn away from hedge funds. For the subsequent a decade, few bosses could attract the mandatory capital to launch new partnerships. By 1984, there were only 68 funds in existence. In the latter 1980s, a little group of highly proficient hedge fund executives, including George Soros, Michael Steinhart, and Julian Robertson, gave hedge funds a revived credibility. Notwithstanding troublesome market conditions, these managers produced yearly returns of larger than fifty percent. Plenty of the worlds best money managers left the conventional prescribed and retail investment firms due to most likely higher costs and great adaptability with handling hedge fund products. By 1990, there were over 5 hundred hedge funds worldwide with assets of $38 bill. Hedge funds now represent one of the biggest segments of the alternative investments industry. Now , it’s estimated that there may be more than six thousand hedge funds in existence with total cash under management higher than $1 trillion.
Commodity trading carries risks and is not suitable for all investors. Past performance is not indicative of future performance.
Hedge funds are a class of alternative investments that will take both long and short positions, use arbitrage, purchase and offload undervalued securities, trade options or bonds, and invest in virtually any opportunity in any market where it predicts inspiring gains at reduced risk. Hedge fund techniques change terrifically — many hedge against recessions in the markets — particularly crucial today with volatility and expectation of corrections in overheated stock exchanges. The first purpose of most hedge funds is to reduce volatility and risk while trying to preserve capital and deliver positive returns under all market conditions. There are roughly fourteen distinct investing strategies employed by hedge funds, each offering different degrees of risk and return. A macro hedge fund, as an example, invests in stock and bond markets and other investment opportunities , for example currencies, in the hope of profiting on important shifts in such stuff as worldwide interest rates and countries’ business policies.
A macro hedge fund is more unsteady but potentially quicker growing than a distressed-securities hedge fund that buys the equity or debt of firms about to leave or enter fiscal trouble. An equity hedge fund could be world or country explicit, hedging against recessions in equity markets by shorting over priced stocks or stock indexes.
A relative price hedge fund takes virtue of price or spread inefficiencies. Knowing and understanding the features of the various different hedge fund methods is crucial to capitalizing on their assortment of investment prospects. It is vital to comprehend the differences between the diverse hedge fund techniques because all hedge funds aren’t the same — investment returns, volatility, and risk change very among the different hedge fund methods. Some strategies which aren’t linked to equity markets may be able to deliver consistent returns with intensely low risk of loss, while others might be as or even more variable than hedge funds.
A successful fund of funds recognizes these differences and mixes varied secrets and asset sectors together to form steadier long term investment returns than any of the individual funds.
* Hedge funds utilize a spread of monetary instruments to reduce risk, augment returns and minimize the relationship with equity and bond markets. Many hedge funds are flexible in their investment options ( can use short selling, leverage, derivatives like puts, calls, options, futures, and so on).
* Hedge funds alter enormously re investment returns, volatility and risk. Many although not all, hedge fund techniques have a tendency to hedge against recessions in the markets being traded.
* Many hedge funds have the power to deliver non-market associated returns.
* Many hedge funds have as an objective consistency of returns and capital preserving instead of magnitude of returns.
* Most hedge funds are managed by experienced investment pros who are sometimes trained and tenacious.
* Pension funds, endowments, insurance corporations, non-public banks and high asset value people and families invest in hedge funds to attenuate overall portfolio volatility and enhance returns.
* Most hedge fund executives are highly specialized and trade only inside their special area and competitive advantage.
* Hedge funds benefit by heavily weighting hedge fund managers’ remuneration towards performance inducements, therefore tempting the best brains in the investment business. Additionally, hedge fund chiefs typically have their own money invested in their fund.
Commodity trading carries risks and is not suitable for all investors. Past performance is not indicative of future performance.
A hedge fund is a lightly regulated investment fund that’s typically open to a reduced range of speculators who pay a performance charge to the fund’s investment chief. Each hedge fund has its own investment technique that dictates the kind of investments it undertakes and these secrets are highly individual. As a class, hedge funds try a bigger range of investment and trading activities than standard long-only investment funds, and invest in a wider range of assets including long and short positions in shares, bonds and commodities. As the name suggests, hedge funds frequently attempt to hedge some of the hazards embedded in their investments employing a spread of strategies, particularly short selling and derivatives. In most jurisdictions, hedge funds are open just to a reduced range of pro or wealthy investors who meet factors set by regulators, and are accordingly exempted from plenty of the laws that rule normal investment funds. The net asset cost of a hedge fund can run into uncountable billions of dollars, and the gross assets of the fund will generally be higher still due to leverage. Hedge funds control certain speciality markets like trading inside derivatives with high-yield ratings and troubled debt. History Sociologist, writer, and money newshound Alfred W. Jones is credited with the making of the first hedge fund in 1949.
Jones believed that movements in prices of an individual asset may be seen as having a part because of the overall market and a part thanks to the performance of the asset itself. To neutralize the consequences of overall market movement, he balanced his portfolio by purchasing assets whose price he was expecting to be stronger than the market and selling short assets he was expecting to be less strong than the market. He saw that movements in prices due to the final market would be canceled out, because, if the final market rose, the loss on shorted assets would be offset by the extra gain on long assets and vice-versa. As the effect is to ‘hedge ‘ that part of the danger due to overall market movements, this kind of portfolio came to be known as a hedge fund. Industry Size Estimates of industry size vary seriously because of the lack of central statistical data, the absence of a fixed definition of hedge funds and the fast expansion of the industry. As a general indicator of scale, the industry could have managed around $2.5 trillion at the pinnacle in the summertime of 2008. The credit crisis has caused assets under management ( AUM ) to fall strictly thru a mix of trading losses and the withdrawal of assets from funds by speculators. Up to date guesses suggest that hedge funds have more than $2 trillion in AUM. A survey of hedge fund directors indicates single chief hedge funds have over $2.5 trillion in assets under administration ( $AuA ).
Biggest hedge fund bosses
The twenty-five biggest hedge fund bosses had $519.7 billion in assets under management as of December 31, 2009. The biggest boss is JP Morgan Chase ( $53.5 bln ) followed by Bridgewater Associates ( $43.6 bill ), Paulson & Company . ( $32 bln ), Brevan Howard ( $27 billion ), and Soros Fund Management ( $27 bill ).
Risks
Commodity trading carries significant risks and is not suitable for all investors. Past performance is not indicative of future performance.
Originally introduced in 1975, managed futures – hedge funds use futures, forwards, and options to get access to the commodity, currency, interest rate, and equity markets. A futures contract is a contract to buy or sell an asset at a particular price at a later time.
When creating a contract position, a trader must post a performance bond, also known as margin, to cover likely losses on the position. As costs change across the life of a futures contract, the trading accounts where performance bonds are held are debited and credited accordingly. Profits are made when the market or spot cost of a commodity surpasses the futures’ price. Extra returns can be made when traders replenish or roll contracts and the sale cost of the old contract surpasses the price of buying the new contract. Interest earned on margin posted in the trading account also makes a contribution to returns.
In 2008, when US and world instruments dropped 38% and 45 percent, respectively, managed futures were up 14%. Managed futures provided robust, uncorrelated returns to normal asset groups that suffered in this period. Establishments and high value people took note, boosting total investment in managed futures to its current level of over $200 bill in assets under management.
Managed futures trading provides a source of liquid return often not linked to other investment classes. This was obviously seen in 2008, when many stockholders thought they’d achieved satisfactory diversification with their investments in long / short equity and event-driven hedge fund secrets, or other possible choices like high-yield debt and real-estate. It seemed of these investments were highly related to Standard & Poor’s five hundred stock index, and financiers found their alternative investments falling in lockstep with their standard investments.
One of the most significant lessons learned during 2008 was that portfolio diversification does not come from the quantity of managers or positions in a portfolio. Diversification comes from building a portfolio of essentially different return streams and managed futures offer various drivers of positive and negative returns.
Managed futures are one of the few alternative investments that have nil or negative link to the equity markets. Since their establishment in the 1970s, managed futures have frequently produced non-correlated returns during periods of stock exchange dislocation. Dr. John Lintner of Harvard Varsity , one of the co-creators of the Capital Asset Pricing Model, first released his seminal work on managed futures in 1983. He concluded that portfolios composed of equity and fixed earnings investments exhibit significantly less variance at each possible level of predicted return when mixed with managed futures. As illustrated in the chart above, Linter’s work remains as current today as it was in 1983. Adding even a bit of managed futures, as represented by the BTOP fifty Index, to a normal portfolio of shares and bonds has offered better returns at lower risk over a twenty year period one which has included Black Monday ( 1987 ), the 1st Gulf War ( 1990 ), long-term Capital Management / Russian debt default ( 1998 ), terrorist attacks on the World Trade Center and Pentagon ( 2001 ), and the up to date liquidity crisis ( starting 2007 ).
Commodity trading carries risks and is not suitable for all investors. Past performance is not indicative of future performance.
Hedge funds are a class of alternative investments that will take both long and short positions, use arbitrage, purchase and offload undervalued securities, trade options or bonds, and invest in virtually any opportunity in any market where it predicts inspiring gains at reduced risk. Hedge fund techniques change terrifically — many hedge against recessions in the markets — particularly crucial today with volatility and expectation of corrections in overheated stock exchanges. The first purpose of most hedge funds is to reduce volatility and risk while trying to preserve capital and deliver positive returns under all market conditions. There are roughly fourteen distinct investing strategies employed by hedge funds, each offering different degrees of risk and return. A macro hedge fund, as an example, invests in stock and bond markets and other investment opportunities , for example currencies, in the hope of profiting on important shifts in such stuff as worldwide interest rates and countries’ business policies.
A macro hedge fund is more unsteady but potentially quicker growing than a distressed-securities hedge fund that buys the equity or debt of firms about to leave or enter fiscal trouble. An equity hedge fund could be world or country explicit, hedging against recessions in equity markets by shorting over priced stocks or stock indexes.
A relative price hedge fund takes virtue of price or spread inefficiencies. Knowing and understanding the features of the various different hedge fund methods is crucial to capitalizing on their assortment of investment prospects. It is vital to comprehend the differences between the diverse hedge fund techniques because all hedge funds aren’t the same — investment returns, volatility, and risk change very among the different hedge fund methods. Some strategies which aren’t linked to equity markets may be able to deliver consistent returns with intensely low risk of loss, while others might be as or even more variable than hedge funds.
A successful fund of funds recognizes these differences and mixes varied secrets and asset sectors together to form steadier long term investment returns than any of the individual funds.
* Hedge funds utilize a spread of monetary instruments to reduce risk, augment returns and minimize the relationship with equity and bond markets. Many hedge funds are flexible in their investment options ( can use short selling, leverage, derivatives like puts, calls, options, futures, and so on).
* Hedge funds alter enormously re investment returns, volatility and risk. Many although not all, hedge fund techniques have a tendency to hedge against recessions in the markets being traded.
* Many hedge funds have the power to deliver non-market associated returns.
* Many hedge funds have as an objective consistency of returns and capital preserving instead of magnitude of returns.
* Most hedge funds are managed by experienced investment pros who are sometimes trained and tenacious.
* Pension funds, endowments, insurance corporations, non-public banks and high asset value people and families invest in hedge funds to attenuate overall portfolio volatility and enhance returns.
* Most hedge fund executives are highly specialized and trade only inside their special area and competitive advantage.
* Hedge funds benefit by heavily weighting hedge fund managers’ remuneration towards performance inducements, therefore tempting the best brains in the investment business. Additionally, hedge fund chiefs typically have their own money invested in their fund.
Many individual and institutional investors search for alternative investment opportunities when there’s a disappointing outlook for U.S. Equity markets.
As financiers try to diversify into different asset sectors, mostly hedge funds, many are turning to managed futures as a solution. But instructional material on this alternative investment vehicle is not yet easy to find.
So here we offer a helpful ( kind of due diligence ) primer on the topic, getting investors started with asking the most relevant questions. The term “managed futures” is about a 30-year-old industry made from pro money managers called “Commodity Trading Advisors” ( CTAs ). CTAs must register with the U.S. Government’s Commodity Futures Trading Commission ( CFTC ) before they can offer themselves to the general public as money managers. CTAs also need to go thru an FBI deep background check, and supply comprehensive notification documents ( and independent audits of finance statements each year ), which the National Futures Association ( NFA ), a self-regulatory watchdog organization reviews.
CTAs often manage their customer’s assets employing an exclusive trading program or a discretionary strategy, which will involve going long or short in futures contracts in areas like metals, grains, equity indexes, soft commodities and foreign currency and U.S bond futures. During the past few years, cash invested in managed futures has more than doubled and will likely keep growing in the approaching years if hedge fund returns flatten and stocks underperform.
A key debate for expanding into managed futures is their potential to lower portfolio risk.
Supporting such a discussion are many educational studies of the results of mixing standard asset groups with alternative investments like managed futures. Dr John Lintner of Harvard University is maybe the most cited for his research in this area. Taken like an alternative investment class alone, the managed-futures class has produced comparable returns in the decade before 2005. As an example, between 1993 and 2002, managed futures had a compound average yearly return of 6.9%, while for U.S. Stocks ( based mostly on the SP 500 total return index ) the return was 9.3% and 9.5% for U.S. Treasury bonds ( based mainly on the Lehman Bros long term Treasury bond index ). Re risk-adjusted returns, managed futures had the smaller drawdown ( a term CTAs use to refer to the maximum peak-to-valley drop in a shares ‘ performance history ) among the 3 groups between Jan 1980 and May 2003. In this period managed futures had a -15.7% maximum drawdown while the Nasdaq had one of -75% and the SP 500 stock index had one of -44.7%.
A further advantage of managed futures includes cutting risk thru portfolio diversification by negative relationship between asset groups. As an asset sector, managed futures programs are inversely related with bond certificates and stocks. For instance, during times of inflationary pressure, making an investment in managed futures programs that track the metals markets ( like silver and gold ) or foreign currency futures can supply a valuable hedge to the damage such an environment can have on stocks and bonds. To explain, if bonds and stocks underperform because of rising inflation concerns, some managed futures programs might outperform in these same market conditions. So, mixing managed futures with these other asset groups may get the most out of your allocation of investing capital.
Commodity trading carries risks and is not suitable for all investors. Past performance is not indicative of future performance.
Originally introduced in 1975, managed futures – hedge funds use futures, forwards, and options to get access to the commodity, currency, interest rate, and equity markets. A futures contract is a contract to buy or sell an asset at a particular price at a later time.
When creating a contract position, a trader must post a performance bond, also known as margin, to cover likely losses on the position. As costs change across the life of a futures contract, the trading accounts where performance bonds are held are debited and credited accordingly. Profits are made when the market or spot cost of a commodity surpasses the futures’ price. Extra returns can be made when traders replenish or roll contracts and the sale cost of the old contract surpasses the price of buying the new contract. Interest earned on margin posted in the trading account also makes a contribution to returns.
In 2008, when US and world instruments dropped 38% and 45 percent, respectively, managed futures were up 14%. Managed futures provided robust, uncorrelated returns to normal asset groups that suffered in this period. Establishments and high value people took note, boosting total investment in managed futures to its current level of over $200 bill in assets under management.
Managed futures provide a source of liquid return often not linked to other investment classes. This was obviously seen in 2008, when many stockholders thought they’d achieved satisfactory diversification with their investments in long / short equity and event-driven hedge fund secrets, or other possible choices like high-yield debt and real-estate. It seemed of these investments were highly related to Standard & Poor’s five hundred stock index, and financiers found their alternative investments falling in lockstep with their standard investments.
One of the most significant lessons learned during 2008 was that portfolio diversification does not come from the quantity of managers or positions in a portfolio. Diversification comes from building a portfolio of essentially different return streams and managed futures offer various drivers of positive and negative returns.
Managed futures are one of the few alternative investments that have nil or negative link to the equity markets. Since their establishment in the 1970s, managed futures have frequently produced non-correlated returns during periods of stock exchange dislocation. Dr. John Lintner of Harvard Varsity , one of the co-creators of the Capital Asset Pricing Model, first released his seminal work on managed futures in 1983. He concluded that portfolios composed of equity and fixed earnings investments exhibit significantly less variance at each possible level of predicted return when mixed with managed futures. As illustrated in the chart above, Linter’s work remains as current today as it was in 1983. Adding even a bit of managed futures, as represented by the BTOP fifty Index, to a normal portfolio of shares and bonds has offered better returns at lower risk over a twenty year period one which has included Black Monday ( 1987 ), the 1st Gulf War ( 1990 ), long-term Capital Management / Russian debt default ( 1998 ), terrorist attacks on the World Trade Center and Pentagon ( 2001 ), and the up to date liquidity crisis ( starting 2007 ).
Commodity trading carries risks and is not suitable for all investors. Past performance is not indicative of future performance.