All signs are pointing to rockier returns for the standard bearers of the investment world: stocks and bonds. With the U.S. Federal Reserve hinting at finally raising interest rates as well as other factors impacting stock returns and bond yields, it’s time to take a closer look at products that are noncorrelated to those investments.
Alternative investments cover a wide asset area, from private equity to hedge funds to managed futures. Managed futures is perhaps the smallest asset space with about $383 billion under management, according to BarclayHedge, a data site that follows CTA (and hedge fund) performance.
Institutional investors often shy away from the futures markets, believing them too risky, however, as part of a portfolio, a managed futures allocation can reduce risk as typically programs are uncorrelated with the S&P 500. In fact, U.S. public pension plan investments in managed futures have surged recently: these funds are adding commodity trading advisors to their Absolute Return Portfolios for many reasons, but mainly to reduce the beta risk from the equity side of the portfolio.
Although there are managed futures programs that skew toward the financial markets, many, especially trend followers, are largely diversified in the commodity markets as well. Many of today’s best hedge fund managers started as CTAs. Most famous is Paul Tudor Jones, who began his stellar career on the floor of the New York Cotton Exchange. Other former CTAs have gone a different way: John W. Henry, owner of the Boston Red Sox and Liverpool Football Club, was one of the largest trend followers in the 1980s and 1990s before taking his prowess into sports management.
There are several managed futures investment options available that depend on amount of money to be invested, risk appetite, liquidity and transparency needs and portfolio goals. Here is a brief list of methods to access managed futures and the commodities markets that pass off the buy/sell worries to a professional trader. This is an abbreviated list, and all these methods vary in structure and accessibility:
- 40 Act funds/mutual funds: Relatively new to the futures business, these products basically are mutual funds with a twist. The upside is investment into these funds can be for as little as $1000, and can access some of the best CTAs in the business that typically would not take an account for less than $1 million. They also are liquid and transparent. The downside is fees can be high and they are not necessarily tax friendly.
- Managed account platforms: Although they have a higher entry fee than 40 Act funds, MAPs allow an investor to tap into a database of preselected and vetted managers and choose single or multiple managers, depending on risk appetite and performance goals. Large wealth management firms like Deutsche Bank have platforms and provide advice, but there are other options, such as Hydra, Gemini and Oasis (through RJ O’Brien) that can provide a lower investment level for access. These products are transparent, liquid, and again can access some of the best performing CTAs at a much lower price point.
- Private placement/limited partnership: Just like any LP, these typically have higher minimums and may be set up for one or multiple CTAs. One such investment is Straits Financial Fund Management LLC, which offers access to Dunn Capital Management with as little as a $10,000 investment, no CTA management fee but a higher performance fee. Dunn is one of the best performing systematic trend-followers available and is out of reach for many investors, with typically a minimum $100,000 investment. This type of fund allows access. The downside of LPs is funds may be locked up on a monthly or quarterly basis.
- Fund of funds: Largely funds that work with hedge funds, there are those that focus on managed futures and CTAs. These too have higher investment levels and typically have higher fees, but may be worth it with professional selection of CTAs and auto-rebalancing of funds.
- Managed accounts: Perhaps the best choice for the largest of investors as it gives them transparency and daily liquidity into a their investment, which typically is a single manager. These have much higher minimums, which vary. Many CTAs offer funds (or even individual 40 Act funds) to avoid the hassle of managing numerous managed accounts, but that said, an investor may have better control with a managed account and lower fees. A major downside is the protection level, or lack there of: just like investing in the market yourself, you could get a margin call with a managed account.
--- Check out Back to the Futures? on ThinkAdvisor.