Investors Should Look Back To Futures
Fund managers argue that managed futures should make up at least 25% of each investor’s portfolio as they have a lower risk and higher return than more volatile stocks and shares.
Slicing a portfolio from the traditional, 60:40 equities and bonds to something more like 25:45:30 futures, equities and bonds is likely to increase returns and reduce risk and historical figures show that trading in futures outperforms traditional stocks and shares when a market crashed, they say.
Other arguments in favour of futures include the markets are easier to buy in and exit, even when the markets are falling and investing in futures is more solid than many other investments.
What are managed futures?
Futures are not new - they have been around for hundreds of years.
At the most basic, a futures contract is an agreement to deliver a specific quantity of a commodity to an agreed destination at a specific time.
These contract details are fixed - the variable is the price and this is where investors can gain or lose money by speculating on the value of that commodity on delivery.
How do futures work?
It’s inevitable the futures price and the real cash price of the commodity will converge at some time.
For example, a managed futures fund can buy a futures contract for, say, 5,000 tons of corn on the first of the month for delivery on the last day of the month.
If our contract were for delivery at £5 per ton above the market rate for corn, fund managers would want to sell and take their profits. This would push the price of futures contracts down in line with the market price.
The opposite is the futures contract is worth less than the cash market, so selling on to someone who wants to secure a cheaper corn supply would bring the market price down.
In simple terms, these strategies are ‘hedging’ and ‘arbitrage’.
What are the benefits of adding managed portfolios to a portfolio?
Instead of an investor managing their own futures positions, it’s easier to hand the job over to a fund manager who can keep a day-to-day eye on investments.
The manager can then implement strategies to ‘offset’ the funds position by taking second futures or options opposite to the initial futures contract.
A futures buyer takes a ‘long position’ in the market - a seller takes a ‘short position’.
These short and long positions allow investors to make money in a falling as well as a rising market.
Virtually any commodity is traded - from currency to foods, oil, gas, and gold.
Because the markets are heavily traded, they are generally more liquid than stock markets and investors can enter and leave the market more easily.
Looking in to the futures’ crystal ball
The G20 is moving to take concerted action against banks, investment funds, and extremely wealthy individuals who are perceived as having the power to manipulate commodity and stock market prices, as they believe the lack of market regulation is one of the underlying causes of the current global recession.
This ability of futures contract investors to influence global markets outside the regulation of individual governments is causing the G20 to team up to police banks and investment funds.
Should the UK government decide to introduce more regulation, then the managed futures funds may suffer from restrictions on investment.
The consensus is a lot of money is available to invest but no one wants to make any moves. Taking a short position in managed futures is one way of putting that money to work without locking in to long-term investment.
Quantative easing - central banks printing money to lessen the effects of recession - may put a dampener on currency futures and interest rate movements, but precious metals seem a natural hedge.
Managed futures have still outperformed equity markets so far in 2009 in a market that is far from active.
The key to considering including managed futures in an investment portfolio is not that the returns are dependent on a rising or falling market, like stocks, shares and property, but more they are on the quality of management of the fund.
Good returns on managed futures derive from picking the right commodity markets and the fund investment strategy.
Taking managed futures advice
Take independent advice from a professional financial advisor before putting any cash in to a managed futures investment.
