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Portfolio > Portfolio Construction

Using Managed Futures in Rough Markets - Part II

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In today’s volatile market, diversifying with managed futures, which typically correlate negatively with stocks and bonds, may go far to smooth out portfolio performance and avoid a steep decline.

Robert J. Lindner of Lindner Capital Advisors, which offers financial advisors help in accessing managed futures, insists that these alternative investments, “would fit into any [high-net-worth] portfolio very nicely. It’s just a question of whether or not you can get them on a cost-effective basis.”

Managed futures are traded by commodity trading advisors (CTAs) registered with the Commodity Futures Trading Commission. Most use a trend-following trading program; others employ one that is market-neutral.

Registered CTAs will be found on the website of the National Futures Association, a self-regulatory body.

If someone who represents himself or herself as a CTA is not listed, “They’re probably a fraud,” said Todd Petzel, an NFA board member for nearly 20 years and CIO of Offit Capital in New York, in an interview.

Another way to invest in managed futures is for an RIA to register as a commodity pool operator. That enables the advisor to direct groups of clients’ assets into the industry, notes Petzel.

Indeed, managed futures can further diversify an already diversified portfolio; but savvy allocation is critical.

“Because managed futures are so new to advisors, a lot of them are afraid to allocate more than 3 percent to 5 percent. If you’re going to use that, don’t even bother. It doesn’t have the effect you’re looking for in terms of diversification and lowering volatility,” says Marietta, Ga.-based Lindner.

Lindner says that his firm’s Contemporary Portfolio series dedicates between 25% and 28% to the class.

In addition, Lindner Capital’s structured-tracker note, issued by Deutsche Bank, replicates the underlying performance of CTAs and “at very low expense. We get the return from the CTAs without having invested directly in them,” he explained.

Other low-correlating alternatives to consider during volatile periods include registered mutual funds such as the Commodity Trends Strategy Fund (DXCTX). Tracking both rising and falling price trends in the commodity market, it delivers long as well as short exposure.

However, cautions Petzel, “when a bull market or a bear market trend continues, [such funds] will do fine; but choppy, directionless markets are extremely difficult for these kinds of traders.”

As hedging opportunities, a number of exchange-traded funds and exchange-traded notes can be easily added to portfolios. For instance, ProShares Ultra-Short DJ-UBS Commodity ETF (CMD) shorts the Dow Jones-UBS Commodity Index and is two times the daily inverse performance of that index.

Opposite of that is ProShares’ Ultra DJ-UBS Commodity ETF (UCD), which attempts to double the daily performance of the same index and is a broad play on a basket of commodity futures. “If the bear market trend in commodities continues, the CMD fund would be a good one to own,” said Ronald L. DeLegge, publisher-editor of “But if the trend stops and commodities are poised to go up, the UCD should do well. It uses leverage and is very aggressive.”

All these tacks could buoy client portfolios — or not.

Concerning managed futures, Petzel cautioned: “There’s a chance that the traders are going to not be entirely correlated — they aren’t guaranteed to go up when your stock is going down.

“I view this whole group of managers as ‘diversifiers’ and not as a hedge. All these guys can lose money in the same week, the same month, the same quarter. And that’s never a happy time,” he said.


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