Ever since I started in the business, the idea of how to get real diversification has always interested me. Especially today, many markets all seem to move in the same direction at the same time, so this poses a great conundrum for investors. What used to be a diversifier a couple decades ago, simply isn’t today. Enter Managed Futures funds. This investment vehicle might sound complex, but at their core, they’re quite straightforward. Let’s break it down in simple terms:

What Are Managed Futures Funds?

Managed futures funds are investment funds that primarily invest in futures contracts. Futures are agreements to buy or sell an asset (like gold, agriculture products, currencies, stock indices, or interest rates) at a future date for a price agreed upon today. These funds are managed by professionals known as Commodity Trading Advisors (CTAs), who use these futures contracts to make bets on the direction of market prices.

How Do They Work?

  1. Futures Contracts: Imagine you’re betting on whether the price of wheat will go up or down in the future. You don’t actually buy the wheat but instead purchase a futures contract that gives you the right to buy or sell wheat at a set price on a specific future date. If you think prices will rise, you buy a futures contract (go long); if you think they’ll fall, you sell one (go short).
  2. Diversification: Managed futures funds often invest in a variety of futures markets, not just one type of asset. This diversification can include everything from agricultural products to financial instruments like stock indices or interest rates. The idea is to spread the risk across different sectors and markets, potentially reducing the impact of a downturn in any single market.
  3. Strategy: The CTAs employ various strategies. Some might follow trends, betting that current market trends will continue (trend following). Others might look for discrepancies between related markets (spread trading). There’s also a strategy called “counter-trend” where they bet against the current market trend, anticipating a reversal.
  4. Liquidity: Futures markets are generally very liquid, meaning you can enter or exit positions relatively easily, which is not always the case with other investment types like real estate.

Benefits of Managed Futures Funds

  • Potential for Low Correlation: These funds often don’t move in tandem with traditional stock or bond markets, providing diversification benefits. When stocks fall, futures might not, or might even rise, balancing out a portfolio.
  • Access to Global Markets: Through futures, these funds can gain exposure to global markets, from crude oil in the US to soybean prices in Brazil, without the need to directly invest in those assets.
  • Hedge Against Inflation: Investing in commodities through futures can act as a hedge against inflation, as commodity prices often rise when inflation does.

In essence, managed futures funds are about using futures markets to speculate or hedge, managed by professionals who aim to make money from market movements. They’re not for everyone, especially given the potential for high volatility and complexity, but they can be a valuable part of a broader investment strategy for those looking for diversification and potentially uncorrelated returns to traditional investments.

This is not an offer to buy or sell securities and always speak with your own financial advisor before making any investment decision.

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