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This episode aired on BloombergTV on Sep 6, 2012

Managed Futures

Managed Futures are, just as they sound, investments in futures contracts that are managed by a proffesional, generally a commodities trading advisor (CTA), on behalf of the client. Such investments run the gamut from commodities futures to finanical derivatives, usually employ trend-following strategies, and tend to be fairly uncorrelated with the larger market.

Q. “Managed futures” are not well understood by most investors, so let’s start with the basics… what exactly are they?

A. Pretty much what they sound like: investments in “futures” that are “managed” by a professional on the investor’s behalf… the person doing the investing is called a commodity trading advisor, or CTA. But it’s really a mistake to think of managed futures as a single asset class: instead, these guys are trading futures in a dizzying array of physical commodities and financial instruments: from the infamous pork bellies to currencies, from oranges to zinc, from propane to t-bills.

Q. So what kinds of strategies do managers use in all these different markets?

A. They deploy several different kinds of strategies, usually involving computer algorithms that are looking for trends. In fact, by far the most common kind of “managed futures” strategies is based on “trend following”: programmatic trading that’s essentially based on the simple idea that once, for example, soybean prices start to rise, they’ll continue to do so for a good while.

Q. So do CTAs create specific sets of recommendations for individuals with futures contracts, like regular investment advisors do with more traditional investments?

A. No, that’s a huge difference and a key point. When you sign up with a CTA, you’re signing up for his style of investing… it’s a little more like buying in to a mutual fund than it is like opening an account with a stock broker. You can, and should, get records of how the CTA’s strategies have performed before investing.

Q. Alright, so what’s the big argument for why investors should look at managed futures?

A. In one phrase, non-correlation. They have a good track record of zigging when the rest of the markets are zagging. Even though I don’t really like talking about the “average” managed futures manager, since they invest in so many different things, the fact is they were up something like 18% in the stock market crash of 2008. Much more impressively, they’ve also been up in 10 of the last 11 big stock downturns, dating back to 1987, and flat in that 11th one.