PART I: A Primer on Managed Futures strategies

Institutional Investors, High-Net-Worth Individuals (HNWIs) and Ultra High-Net-Worth Individuals (UHNWIs) are increasingly including Managed Futures as part of a diversified investment portfolio as they explore alternative or non-traditional investment opportunities, which include but aren't limited to crypto assets, commodities, private equity, venture capital, as well as hedge funds. The term 'managed futures' refers to investment strategies whose universe is exclusively futures traded in exchanges across diversified asset classes. Futures contracts are standardized contractual agreements to buy or sell a particular underlying financial instrument or physical commodity at a predetermined price in the future.

Underlying Assets Traded in Managed Futures Strategies

1- Equities ? S&P 500 ? Euro Stoxx 50 ? FTSE 100 ? Nikkei 225 ? Hang Seng

2- Fixed Income ? US Treasuries ? UK Gilts ? JGBs ? German Bunds

3- Currencies ? AUD ? CAD ? GBP ? EUR ? JPY

4- Commodities ? Agriculture ? Precious Metals ? Industrials ? Energy

?

1. What are Managed Futures strategies?

Managed Futures strategies are a diverse subset of active hedge fund strategies that trade liquid, transparent, centrally-cleared exchange-traded products, and deep interbank foreign exchange markets. Managers in this sector are called Commodity Trading Advisors (CTAs). This name is archaic as historically most CTA activity was in commodities. Currently, CTAs strategies are largely focused on financial futures markets — equity indices, fixed income, and foreign exchange — with additional allocations to energy, metals, crypto assets and agricultural markets.

2. Have Managed Futures strategies changed since their advent in the 1980s?

While the predominant strategy remains trend following, this approach has evolved significantly in sophistication in recent years, and the overall space has become increasingly diverse given advancements in technology.

• The number and variety of short-term, high-frequency systems has risen sharply with the advances in trading technology, data analysis, and increased interest from quantitative traders in establishing their own trading firms.
• In general, trend followers aim to identify and exploit sustained capital flows across asset classes as markets move back out of and into equilibrium, often after prolonged imbalances.
• Other style include volatility and choppy price action that accompanies these flows, as well as a variety of other market phenomena.

3. Why should investors include Managed Futures in their portfolios?

Managed Futures strategies can be a source of uncorrelated alpha because they are directionally unbiased, often cover a variety of time frames in their position holding periods, and have historically sought returns independently of the prevailing economic or volatility regime. Overall, these strategies have performed well during many periods that were difficult for equity markets and other hedge fund strategies. This is a result of the internal diversification, unbiased directionality, and the risk management styles of CTAs. Managed Futures strategies should be treated as additional sources of uncorrelated returns rather than as a portfolio hedge.????????

• Managed Futures strategies tend to reduce portfolio variance. The addition of uncorrelated variance may also have a beneficial effect on other performance and risk metrics.
• The exchange-listed underlying instruments used by CTAs facilitate risk management and mitigate many of the risks associated with model risk. The margining process also allows for flexible and effective cash efficiency.

In the second part to this series, we will discuss liquidity, risk management and leverage within managed futures strategies. For more information, contact us on [email protected]