The term managed futures describes an industry made up of professional money managers known as commodity trading advisors (CTAs). Investment management professionals have been using managed futures for more than 30 years. With practically a zero correlation with stocks, one of the most attractive features of managed futures is its ability to add profound diversification to an overall investment portfolio.
Request Free Information Kit on any Commodity Trading Advisor - or to have a licensed broker contact you and answer any questions you may have regarding managed accounts.
Diversification for Today's Investor - Information on Managed Futures
Many investors are under the delusion that their portfolios are diversified if they are in individual stocks, mutual funds, bonds, and international stocks. While these are all different investments, they are all still in the same asset class and generally move in concert with each other. When the bubble burst in the stock market, this was made painfully clear. Proper diversification according to Modern Portfolio Theory is in different asset classes that move independently from one another.
Our comprehensive brochure is intended to better inform you about the potential benefits and risks associated with portfolio diversification with professionally managed futures.
- Dr. Harry Markowitz, the father of Modern Portfolio Theory, who won a Nobel prize for his work, concluded that holding securities that tend to move in concert with one another does not lower risk. Diversification reduces risk only when assets are combined whose prices move inversely, or at times in relation to one another.
- A diversified portfolio of non-correlated assets can provide the highest returns with the least amount of volatility.
- One of the most non-correlated and independent investments versus stocks is professionally managed futures.
- Recent growth in managed futures has been substantial. In 2000, it was estimated that there was $37.90 billion was under management by managed futures trading advisors. By the end of second quarter of 2012, that number had grown to more than $327 billion. According to Barclay Hedge, one of the oldest and most respected providers of alternative investment data, out of the total $1.78 trillion invested in alternative investment strategies Managed futures is now #1 surpassing all other investment strategies based on assets under management.
- Jack Meyer, the head of Harvard University's Endowment portfolio, concerning futures, stated, "Holding commodities offers protection against the ups and downs of stocks and bonds." Referring to commodities, he added, "They're the most diversifying asset in the portfolio…The benefits of diversification are indisputable. Diversification rules. It's powerful and our portfolio is a good deal less risky than the S&P 500."
- Managed futures trading advisors can potentially generate profit in both rising and falling markets due to their ability to go long (buy) futures positions in anticipation of rising markets or go short (sell) futures positions in anticipation of falling markets. Moreover, trading advisors are able to go long or short with equal ease.
- The major source of income for the majority of CTAs is an incentive fee that can only be earned by producing on-going new profits for an account. (Net of all costs.)
- Managed futures have tax benefits over stocks. According to the Tax Act of 1981, short-term profits in commodities are treated as 60% long term and 40% short term. On the other hand, short-term trading profits in stocks are treated as 100% short term. A short-term investment is one that is held for less than one year. This favorable tax treatment in commodities can translate to investors in upper tax brackets, saving as much as 30% on taxes in short-term gains on commodities versus stocks!
Powerful Studies On Managed Futures
- The Chicago Mercantile Exchange published a study concluding that portfolios assigned as much as 20% in managed futures yields up to 50% more than stock and bond portfolios, while possessing comparable risk.
- The Chicago Board of Trade published a study showing a portfolio without managed futures under performs and is more risky than a portfolio that includes managed futures.
- Contrary to popular belief, at certain times, managed futures frequently display less volatility than U.S. equities and interest rate instruments.
- Individual results may vary. A customer may not experience these results in the future. Bear in mind in futures, the potential exists to lose more than your initial investment.
- Thomas Schneeweis, Professor of Finance, at the University of Massachusetts, destroyed the myth that managed futures are riskier than stocks in an academic study. He concludes: "Managed futures are not more risky than traditional equity investment. Investment in a single commodity trading advisor is shown to have risks and returns which are similar to investment in a single equity. Moreover, a portfolio of commodity trading advisors are also shown to have risks and returns which are similar to traditional equity portfolio investments." The paper was prepared for educational purposes and does not address the significant risks inherent in futures trading. Futures trading is not suitable for all investors. An investor could potentially lose more than the initial investment.
- Studies have shown professional Commodity Trading Advisors do experience an appreciably higher success rate than the individual amateur trader. The fact is, there are numerous Commodity Trading Advisors with consistent returns achieved through prudent money management. You are, however, subject to the risk of loss no matter who is managing your money.
Questions and Answers - Managed Futures
Q. What is a CTA managed futures account?
A: A CTA managed futures account is one where a registered Commodity Trading Advisor (“CTA”) is given responsibility to make all trading decisions. This authority is delegated by the account holder to the CTA through a limited power of attorney which may be withdrawn at any time.
Q: How can I track the performance in my managed account?
A: All accounts have total transparency. Clients have 24/7 access to their accounts via a password protected Web site disclosing all trading activity and account balances. Funds can be liquid and accessible within one weeks notice. You may also call your Managed Futures Specialist who receives a daily equity run detailing all your open positions, netting out profit and losses, showing the exact daily balance in your account. Whether you call or not, a purchase and sale statement (P/S Statement) automatically will be sent to you on every single trade, showing the date and price entered; when you exit a trade, the date, price, and net profit or loss on the trade as well as your account balance. Besides receiving confirmation on each individual transaction, a summary of all transactions showing their results are posted on the web via your password protected account. Instead of having your statements post office mailed, you can select having your P/S statements e-mailed directly to you! Therefore, even without calling, you will have a written, detailed breakdown of the CTA’s transactions and performance in your account.
Q: How does my CTA get paid for managing my account?
A: Most CTAs receive an on-going management fee on the account balance in the range of 2% per year, whether the account is profitable or not, and an incentive fee that varies widely depending on the CTA. These fees are usually paid either monthly or quarterly which is detailed Modern Portfolio Theory: Dynamic Diversification for Today’s Investor in each CTA’s disclosure document. However, United Futures has negotiated with the majority of its CTAs, for the benefit of our clients, that the CTAs reduce their on-going fees. THE MAJOR SOURCE OF INCOME FOR THE MAJORITY OF RECOMMENDED CTAs IS AN INCENTIVE FEE THAT CAN ONLY BE EARNED BY PRODUCING ON-GOING NEW PROFITS FOR AN ACCOUNT net of all costs.
Q: How accessible are my funds in a managed account?
A: Although we strongly advise you to view your managed account as a long-term investment, part or all of your funds may be available at any time.
Q: If I am an experienced futures trader why should I have a managed account?
A: There are numerous top-performing CTAs who have managed accounts with other CTAs. When you are trading your own account, you are limited to your trading system and style. By diversifying with CTAs who have good performance records, you are, in effect, constructing a diversified trader’s portfolio of your own, the merits of which are discussed in this brochure.
Q: Are there any tax benefits to investing in managed futures?
A: Yes. According to the Tax Act of 1981, short-term profits in commodities are treated as 60% long term and 40% short term. On the other hand, short term trading profits in stocks are treated as 100% short term. A short-term investment is one that is held for less than one year. This favorable tax treatment in commodities can translate to investors in upper tax brackets, saving
as much as 30% on taxes in short term gains on commodities versus stocks!
Q. Can I use retirement funds in a managed account?
A. Absolutely. You can use IRA, trust, pension, and other retirement monies. You can use managed futures in a variety of qualified retirement plans including IRAs, trusts, and pensions.
Q: How do I open a managed account?
A: Before opening a managed account, you must be supplied with a copy of the CTA’s disclosure document. Read it carefully before you invest. Go over questions you may have with your Managed Futures Specialist. After any questions you may have are answered, have your Managed Futures Specialist help you fill out the management agreement with the CTA and the customer agreement forms, both of which should be sent to United Futures Trading for processing.
Trading futures and options involves substantial risk of loss and is not suitable for all investors. Past performance is not necessarily indicative of future results. This matter is intended as a solicitation.