With a simple switch to managed futures as an alternative asset class, you can reduce risks and realize solid long term returns in any kind of economic environment, be it a bullish or bearish market.

Managed Futures Benefits

1. True diversification from traditional markets. Managed futures exhibits a low correlation to the other traditional asset classes such as real estates, bonds and stocks, and has attained a strong performance with long term track of records during both the up and down markets.

2. Volatility reduction. With managed futures, the general portfolio volatility is reduced. This is due to the fact that managed futures invests in a diverse range of asset classes with the key intent of achieving stable long term returns. It has been a trend that when some assets classes rise, others go down; managed futures has proven to be robust in all economic situations.

3. Better performance during economic recessions. When the stock market decline, managed futures might still thrive as a result of the options and short-selling strategies they put in practice during such times.

4. High returns and volatility reduction at the same time. Managed futures and commodities, when used hand in hand with other traditional asset classes may aid in managing and mitigating risks, and at the same time also lead to increased returns.

5. Utilized by pension plan sponsors. For a long period of time, pension plan sponsors have employed managed futures to produce returns over and above the S&P 500.

6. Accessibility to a wide range of liquid and transparent global futures and products. The Commodity Pool Operators (CPOs) and Commodity Trading Advisors (CTAs) have the ability to invest in more than 150 liquid products around the world such as agricultural products, fixed income, indexes, metals and energies.

7. Credibility and trustworthiness. The CTAs, the CPOs and managed futures trades are all regulated. Consequently, trading on a regulated market enhances trustworthiness and credibility.

8. An Overall outstanding industry growth. For the past 3 decades, assets under the management of the industry of managed futures have recorded an 80,000% growth, a clear indication it is on the rise.

How Managed Futures Accounts are Run

The standard managed futures account is established just like a self-directed account, at an reputable Managed Futures Broker. When setting up the account you will sign a Limited Power of Attorney, which gives the manager (almost always a CTA) the ability to trade on your behalf. About $10,000 is the minimum requirement, although many futures traders will require much higher minimums.

About $200 billion in the US is under management by CTAs in these accounts, which typically buy or sell futures in cotton, grains, pork bellies, oil, currencies, and indices. The CTAs employ a number of techniques and strategies in their trading, such as technical analysis, economic forecasts of supply/demand, weather, price patterns, and other algorithms.

By allocating about 5% to 10% of your portfolio to managed futures, you can offset losses in other investments. If you’re in any of the industries associated with futures, you can control your costs by purchasing or selling futures in your particular commodity sector.

The Long-Term Outlook of Managed Futures

While no one can forecast the performance of managed futures in general, we do know that flameouts are possible and fairly routine. BarklayHedge, which tracks hundreds of managed futures accounts, replace about 15% of their constituents each year.

And as comprehensive as these indices are, they can’t necessarily include every managed account. There is no central database because regulations don’t require one. So no one knows how many average or losing accounts are left out of the list.

Managed Futures Fees

Each manager has the freedom to establish a fee structure for any particular account. Typically, you can expect to see two types of fees: a management fee of around 2%, and a performance fee. The performance fee is the reward to the manager for earning profits on your account. These fees can run from 10% to 50%. Additionally, the introducing broker can earn a fee of as much as 6% for putting you into the fund.

How Profits are Made

A futures contract is an agreement between two parties, a buyer and a seller. Either one can initiate the transaction. In the case of buying, the purchaser agrees to buy a commodity at a specified price in the future. That “future” may range from a few days to a few months. To “seal the deal” the purchaser puts up collateral in the form of margin, which is usually 15% or less of the contract price.

There are three scenarios in which futures traders can earn profits.

1. The “spot” price of the commodity can increase or decrease after the contract is entered into. If you’re on the right side of the transaction, you can earn the difference between the spot price and the price at which you agreed to buy or sell.

2. A trader can earn a “roll return” by selling last month’s contract for more than the cost of the next month’s contract.

3. The trader’s cash collateral will earn interest. It won’t earn enough to cover the costs of entering into the contract, but it will help.

The Sum of the Game

If you plan on investing in a managed future’s account, you need to look at the manager’s track record. In the US, any CTA who manages futures must publish the results of ALL managed accounts, including the losers. Obviously you want a manager who’s been in the business a while and has earned a fairly consistent profit. Consistency is not as important in futures trading because the manager may specialize in seasonal commodities which only make money at certain times of the year. So a long-term view is most important.

Futures have made many people wealthy, and they have out-performed the S&P 500. This is their appeal to us, and to investors who have the risk capital to participate in managed futures.

Futures

Because of the attractive potential for consistent returns, futures trading represents a viable and time-proven asset class for financial investors. Over the past years it’s been an effective tool to hedge against inflation and economic drawdown.

Even so, more than ninety percent of investors who try commodities will lose their money. However this doesn’t mean that you must suffer the same fate. You stand a good chance to win only if before you start trading, you identify the specific reasons why most traders lose.

A Few Futures Trading Basics

It’s important to be aware and have at least a basic knowledge of the four different types of futures contracts that are available for trading. These four, in no particular order, are currencies, commodities, stock market indices, and bonds. All of the futures available for trade in today’s markets fall within one of these four broad categories.

Trading Futures is Not a Game

According to Bruce Babcock of the Reality Trading Company, it’s not impossible to determine factors that make futures trading professionals stand out from the crowd. One of the characteristics that separates novice traders from professionals is the mindset: Novice traders view futures trading as a hobby, or game. To the professionals, it is a business and treated with all the due seriousness.

In futures trading, especially managed futures, successful traders not only have trading plans, but follow them consistently. This planning is an area most people neglect, or forget, or simply dismiss (perhaps because they won their first trade and decide that “this is easy”). Few traders work out a realistic and durable trading plan. Most amateur traders keep on going from trade, making decisions based on something they have just read or from the news without any consistency or testing. Taking positions in commodities based on emotions is often thrilling especially when one is winning. However, in futures (as with most other asset classes) this type of trading is considered gambling. Eventually gamblers lose their money. Intelligent trading is considered boring because trading strategies are planned in advance according to a thoroughly tested and proven methodology. Such strategies are more likely to yield profits over the long run.

Develop A Futures Trading Strategy

Having a thoroughly tested methodology and being able to follow it consistently as a doctrine is not easy. It requires self discipline and patience. A futures tradingprofessional is able to resist a temptation (that reason that always seem to be a good reason) and stick to the plan. This type of trader has the patience and discipline to abide by a trading plan and take trade position no matter the reasons that may prompt an exception.

To be successful in trading futures, you must stay disciplined and rational in the face of rapid gains and losses .

It’s also advisable to be aware of what futures each market trades in, what hours each market keeps, and the size, expiration, and trading volume of the average contracts sold in them. This is especially important when it concerns the market in which the particular futures you plan to specialize in are sold. If you want to trade in gold futures, do an in-depth study on the COMEX market.

Try to keep an eye out for any financial news about the futures contracts that concern you. Staying up-to-date on the latest news about the futures you are trading in can help you to make the right decisions at the right moments. Remember, though, that a lot of so-called “news” is actually only speculation or rumors. Only time will give you a good feel for differentiating the rumors and gossip from the actual nuggets of truth.

Study up on the particular futures contracts you plan to trade in, and find out what factors contribute to its price fluctuations. If you are aware that the price of coffee futures, for instance, tends to shoot up whenever there is a drought in certain regions, you will know to keep an eye on weather patterns and predictions for those regions. Studying the price history of the futures contracts you trade in can help you to be aware of any patterns that are commonly associated with those futures. It can come in handy to know, for instance, that a certain futures contract tends to double bottom or double top before changing direction.

Create a futures trading strategy and abide by it.

Finally, stick to your plan no matter what happens. Emotions are the enemy of a good trader. Don’t let fear or greed get the best of you. Stay on course in spite of setbacks, and you will see long-term returns with futures.