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In This Issue:
Bruce Tursman of Lind-Waldock explores an alternative way to invest in the futures market using a managed futures account.
|July 5, 2007||TraderSavvy.com | Read Past Issues|
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Making the Move to Managed Futures
If you are exploring an investment in futures for the first time, you might not know all the alternatives available to you. Perhaps you've considered trading yourself, but have decided you'd rather let a professional money manger take the reins—and make the day-to-day decisions for you.
You are probably familiar with the way mutual funds operate, but may not realize there is also a way you can invest in commodity futures markets through a passive, hands-off approach—via a managed futures account. Like choosing a mutual fund, you have many choices to make when selecting the right managed futures program for you. Choosing the right commodity trading advisor (CTA), the professional who will be running it, is equally important.
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What are Managed Futures?
Managed futures represent an industry comprised of professional money managers who manage client assets on a discretionary basis, using global futures and options markets as an investment medium. Often the term managed futures is considered a subset of the hedge fund industry, although managed futures operate exclusively in the futures markets, not cash equity markets. The manager makes all decisions on the clients' behalf through a revocable power of attorney. These managers use a variety of trading approaches; some rely exclusively on technical analysis to make their decisions, others, fundamental information, and others, a variety of both. These managers, called commodity trading advisors (CTAs), are registered with the National Futures Association.
Growing numbers of corporate, institutional and individual investors have been allocating a portion of their portfolio's assets to managed futures accounts.
According to Barclay's Research Group LTD, money under management during the first quarter of 2007 was $172 billion. This figure represents a 27.4 percent increase in assets over the past 12 months.
Each CTA employs its own unique strategy and trades a unique combination of markets.
Why Managed Futures?
Many investors find managed futures can reduce volatility in their overall investment portfolio. Research has shown that there's a relatively low correlation between the performance of managed futures and stock prices or interest rates over time. Through a managed futures investment, you'll have access to futures markets around the globe. CTAs trade financial futures including stock indexes such as the Standard & Poor's 500 or the Nikkei 225, interest rate vehicles such as U.S. Treasury notes or the German bund, or currencies such as the euro or yen. Traditional commodity markets traded include crude oil, gold, wheat and soybeans.
Unlike other asset classes, where profits depend solely on price appreciation, opportunities in commodity futures trading exist in both rising and falling markets. Strategies using options on futures contracts seek to provide profit potential in flat or neutral markets.
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Making the Decision
While adding a managed futures component has the potential to enhance your portfolio, this type of investment is not appropriate for everyone. A determination must be made as to your particular suitability, and you will be provided with all of the necessary information to make sure you understand both the risks and possible rewards of this type of investing. Generally, in addition to having the required risk capital, you need to have realistic expectations about potential returns on investment, and tolerance to losing periods, or drawdowns, that inevitably will occur with managed futures products.
There are many resources available to help you determine whether managed futures are right for you. Extensive databases of CTAs are available that include information such as performance, margin use and risk management.
As you look at an individual CTA's statistics, you want to first make a determination of the risk tolerance you can accept. Observe the maximum drawdown amount associated with the CTA, and check the return/maximum drawdown average. You may also get an idea of the CTA's use of money management from the amount of average margin used.Next in importance to consider would be the monthly performance report. You can view the monthly percentage gains and losses for the CTA, the totals for the year, and the amount of money under his or her management.
Looking Beyond Performance
There are many important factors to consider when investing in a CTA program that can go beyond just looking at the returns in any given month or year. For example, a CTA with an annualized rate of return of 30 percent might look better to you on the surface than one with a 10 percent return. However, this may be deceiving if they have radically different dispersion of losses—that is, one advisor may have more volatility in terms of returns throughout the year, while another sees a more steady rate of return. The CTA with a 30 percent gain may have average drawdowns of 30 percent, while the CTA with 10 percent annual returns may average drawdowns of only 2 percent.
Another aspect to look at is the Sharpe ratio. This number is in essence, a measure of risk-to-reward efficiency of an investment. This number can help you determine if the returns are due to smart investment decisions—or a result of excess risk. The greater the Sharpe ratio, generally the better the risk-adjusted performance.
What About Management Fees?
Typically, the trading advisor or trading manager is compensated by receiving a small management fee based on assets under management, in addition to a performance "incentive" fee based on profits in the account. The performance fee is almost always calculated net of all costs to the account, such as management fees and commissions. The performance fee is thus based on net trading profits, which are usually paid only each quarter if the account reaches a new high-water mark. So, while you might initially balk at fees, if the manager is earning large returns, his or her services may be worth paying a premium for.These are just a few factors to consider when choosing a managed futures program. Do your your homework. If you are new to managed futures, consider working with a professional to determine if a managed futures account is right for you.
About Today's Author:
Bruce Tursman is Account Executive, Managed Futures Division of Lind-Waldock. He joined Lind-Waldock in 1996 and has served in Lind-Waldock’s Trade Center, and also as a dealer and proprietary trader in Lind/Refco FX operations. Prior, he worked at Stotler & Co. in arbitrage bond operations. He has extensive industry experience spanning both financial and agricultural markets.
Years Trading: 27
Favorite Movie: Bridge Over the River Kwai
He can be reached via phone at 312-788-2988 or 800-452-1030, or via email at firstname.lastname@example.org.
Past performance is not necessarily indicative of future trading results. Trading advice is based on information taken from trade and statistical services and other sources which Lind-Waldock believes are reliable. We do not guarantee that such information is accurate or complete and it should not be relied upon as such. Trading advice reflects our good faith judgment at a specific time and is subject to change without notice. There is no guarantee that the advice we give will result in profitable trades. All trading decisions will be made by the account holder.
Futures trading involves substantial risk of loss and may not be suitable for all investors. © 2007 Lind-Waldock® a division of Man Financial Inc All Rights Reserved. Futures Brokers, Commodity Brokers and Online Futures Trading. 141 West Jackson Boulevard, Suite 1400-A, Chicago, IL 60604.
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