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Managed Futures Overview

“Managed futures” refers to an asset class offered by professional money managers who are known as “commodity trading advisors” (CTAs). CTAs are required to register with the U.S. government's Commodity Futures Trading Commission (CFTC) through the “National Futures Association” (NFA), before they can offer themselves to the public as money managers. Commodity Trading Advisors are also required to go through an FBI deep background check, and provide comprehensive disclosure documents, which are required to be updated every nine months and reviewed by the NFA before investment services can be offered. “Managed futures” is arguably the first and oldest hedge fund style, having been in existence for over 30 years.

CTAs manage their clients' assets employing proprietary trading systems. Some utilize systematic computer driven mechanical strategies and others employ discretionary methods. Managed futures programs generally take long or short positions in futures contracts, offered worldwide, such as equity indexes (S&P futures, FTSE futures), soft commodities (cotton, cocoa, coffee, sugar), metals (gold, silver), grains (soybeans, corn, wheat), foreign currency and government bond futures.

The strategies and approaches within “managed futures” are extremely varied. The one common unifying characteristic is that these managers trade highly liquid, regulated, exchange-traded instruments and foreign exchange markets. This permits the portfolio to be “marked-to-market” every day. Trend-following CTAs develop algorithms to capture and hold longer-term trends in the markets which may last from several weeks to over a year. Counter-trend approaches attempt to capitalize on the rapid and dramatic reversals that take place within these long term trends. Those that specialize in short-term trading may hold positions for one day or less. Some managers employ analysis of fundamentals (factors that impact supply and demand) within their strategies. Other CTAs develop systematic programs that use advanced quantitative techniques such as signal processing, neural networks, genetic algorithms and other methods borrowed from mathematics and science.

One of the benefits of including managed futures in a portfolio is risk reduction through portfolio diversification by means of low or negative correlation between asset groups. As an asset class, managed futures programs are non-correlated with stocks and bonds. For example, during periods of inflationary pressure, investing in managed futures programs that trade commodities and foreign currency futures can provide a counterbalance to the losses such an environment may produce in equities and bonds. If stocks and bonds underperform due to rising inflation concerns, certain managed futures programs might outperform in these same market conditions. Many industry studies have demonstrated the benefits of investing in managed futures programs. Combining managed futures with other asset classes may improve risk adjusted portfolio returns over time.

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