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August 27, 2010 at 08:00 PM
To lower risk, many well thought-out portfolios this fall will embrace some decidedly risky investments: managed futures.
With an inverse correlation to traditional asset classes, managed futures can reduce volatility and spread risk, thus helping to protect against the effects of a severe market slide.
“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.
