To lower risk, many well thought-out portfolios this fall will embrace some decidedly risky investments: managed futures.
“Managed futures zig when everything else zags. They behave differently from hedge funds, REITS — what have you,” said Robert J. Lindner, CEO, Lindner Capital Advisors and author of the upcoming book, “Managed Futures: The Missing Piece of the Portfolio Puzzle,” in an interview.
For years, managed futures were used only by institutional investors; but since 2007 they’ve been accessible to individual investors as well, according to Lindner.
Still, “Unless you, as an investor, have enough sophistication to understand when managed futures can be volatile and how volatile they can be, they’re completely inappropriate,” explained Todd Petzel, CIO of Offit Capital, in an interview. A 30-year veteran of the futures industry, Petzel is a former chief economist of the coffee, sugar and cocoa exchange.
Investments in managed futures are speculative and therefore hold significant risks; they are, for example, illiquid. And their high fees and expenses can take a sizable chunk out of returns.
Nevertheless, over the last decade, money invested in this class has more than doubled. Its growth is forecast to continue “if hedge fund returns flatten and stocks underperform,” according to John Summa, a commodity trading advisor and founder of TradingAgainstTheCrowd.com.
On a typical day, Lindner said, “You’re looking at more than $1 trillion of trading activity. It’s very high-speed, very systematic; and there is little or no subjectivity of what gets traded.”
Managed futures can be used to long or short commodity, interest rate, equity and currency markets. They are traded by registered commodity trading advisors.
“CTAs have the opportunity to go short any time they think is appropriate,” said the New York-based Petzel.
“Systematic traders follow trends,” he explained. “When, say, the stock or bond market is going south, they can pretty quickly establish a short position and take advantage of it. With the uncertainty out there now, people are looking at managed futures and CTAs for that kind of opportunity.”
While managed futures won’t do better than traditional investments year in and year out, in a down market “they outperform significantly,” added Lindner, who is based in Marietta, Ga.
“Over a three- or five-year period, because of the reduced volatility, a portfolio with managed futures should exceed the return of one without them by about 200 or 250 basis points, annualized,” he explained.
Lindner, a turnkey asset manager, helps financial advisors invest in managed futures. “I would argue that not only is now the right time to invest in managed futures,” he said, “but any time is probably a great time to use them in a well diversified portfolio of stocks and bonds. They behave like no other asset class.”