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Managed futures strategies

This type of strategy is based on a simple idea: try to take advantage of an exposure on futures contracts («Futures») with the underlying being a financial instruments or a commodity ...

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Among the different "hedge fund" strategies the "Managed Futures" category is undoubtedly one of the most misunderstood. Yet it is a strategy in itself, as well as the "long / short equity" or "Convertible arbitrage" for example.

This type of strategy is based on a simple idea: try to take advantage of an exposure on futures contracts ("futures") having as the underlying financial instruments (interest rates, currencies and indices) or commodities (energy, metals and agricultural products).

Leverage is traditionally used and is simply the mechanism of deposit offered by the clearing house of the various stock exchanges on which are listed futures contracts: only a fraction of the nominal value of the contract is indeed required, to open a speculative position.

In general, the investment philosophy boils down to profit from price movements of different futures, both the upside and downside. This is, in most cases, benefit from the upward and downward trends, using techniques of technical analysis, the so-called "trend following". The simplest example of this technique is the moving average over a futures contract: the idea is to have a long position when prices are above their moving average and vice versa prices are below their moving average.

These "trend following" techniques are, in general, systematized, that is to say that the manager of a "Managed Futures" fund will systematically monitor the buying and selling signals provided by his strategy. In this way, he ignores all feeling and emotion. Thanks to the current computer tools, This approach allows, also, to monitor and treat simultaneously a multitude of markets, which offered him, therefore, better diversification to his risk.

This is the need to use the computer that explains why this type of strategy has recently emerged, fully benefiting from the current stock exchange electronization. From a few billion in assets under management in 1985, this type of strategy approach now the 200 billion according to Barclay Hedge, 75% of these stocks being represented by "managed futures" with a systematic "trend following" approach.

Even if they look "black box" buy / sell generating signal, leaving generally investors reticent - proof with the total amount of "Managed Futures" that represents about 10% of the total outstanding hedge fund strategies, estimated at about 2000 billion by the experts - the benefits of "managed futures" strategies are far from being negligible. First, since the financial crisis, these strategies have provided a largely positive performance as a whole, benefiting fully from the "flight to quality" observed in the bond markets in 2007 and 2008: it is nearly 20 % increase over the last two years for the Credit Suisse / Tremont "managed futures" index, but also a negative correlation with the broad Wall Street index - S & P 500 - so important to investors.

But after the recent bank failures or difficulties encountered by some "hedge funds" to properly assess some of their assets or to trade them in the market, the "Managed Futures" funds have the advantage of benefiting from liquid financial products , (the daily volume of the "bund future" is about 100 billion dollars for example), transparency in terms of price (a closing price fixed on a daily basis and available to the public) and characterized by a zero counterparty risk through the clearing houses of different stock exchanges.

But these benefits are clearly not totally convinced most investors!

RF , March 2010

Article also available in : English EN | français FR

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  • Managed futures strategies November 19,2011,  13:43, by mikedever [Asset Management]
    <p>Managed futures, because they can employ so many different return drivers (which I discuss in my book), and trade across so many global markets, provide tremendous portfolio diversification. They are a key component of the truly diversified portfolios I present in my book "Jackass Investing: Don’t do it. Profit from it." Their inclusion both improves returns and reduces risk (by more than half). I’m pleased to provide a complimentary link to the chapter that discusses futures trading here: <a href="http://jackassinvesting.com/lookinside/lookinside_chapter_12-65.php" class='spip_url spip_out' rel='nofollow external'>http://jackassinvesting.com/lookins...</a>.</p>

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