Managed futures account
Financial market participants |
---|
Organisations |
Terms |
A managed futures account (MFA) or managed futures fund (MFF) is a type of
Characteristics
Managed futures accounts are operated on behalf of an individual by professional money managers such as
Trading strategies
Managed futures accounts may be traded using any number of strategies, the most common of which is trend following. Trend following involves buying in markets that are trending higher and selling short in markets that are trending lower. Variations in trend following managers include duration of trend captured (short term, medium term, long term) as well as definition of trend (e.g. what is considered a new high or new low) and the money management/risk management techniques. A theoretical optimal portfolio capturing trends has been derived,[5] and these trends have been widely documented. [6] [7] Other strategies employed by managed futures managers include discretionary strategies, fundamental strategies, option writing, pattern recognition, and arbitrage strategies, among others.[8] However, trend following and variations of trend following are the predominant strategy.[9]
Notional funding
In many managed futures accounts the dollar amount traded is equal to the amount provided by the investor. However, managed futures also allows investors to leverage their investment with the use of notional funding, which is the difference between the amount provided by the investor (funding level) and the mutually agreed upon amount to be traded (trading level).[10] Notional funding allows an investor to put up only a portion of the minimum investment for a managed futures account, usually 25% to 75% of the minimum. For example, to meet a $200,000 minimum for a CTA that allows 50% notional funding, an investor would only need to provide $100,000 to the CTA. The investment would be traded as if it were $200,000, which would result in double the earnings or losses, as well as double the management fee relative to the actual amount invested. As a result, notional funding can add significant risk to managed futures accounts and investors who wish to use such funding are required to sign disclosures to state that they understand the risk involved.[11]
Performance
Managed futures have historically displayed very low correlations to traditional investments, such as stocks and bonds.[12] Following modern portfolio theory, this lack of correlation builds the robustness of the portfolio, reducing portfolio volatility and risk, without significant negative impacts on return. This lack of correlation stems from the fact that markets tend to "trend" the best during more volatile periods, and periods in which markets decline tend to be the most volatile.[4] From 1980 to 2010, the compound average annual return for managed futures was 14.52%, as measured by the CASAM CISDM CTA Equal Weighted Index, while the return for U.S. stocks was 7.04% (based on the S&P 500 total return index).[13] However, managed futures also have high fees. According to data filed with the U.S. Securities and Exchange Commission and compiled by Bloomberg, 89% of the $11.51 billion of gains in 63 managed-futures funds went to fees, commissions and expenses during the decade from Jan. 1, 2003, to Dec. 31, 2012.[14]
History
In the United States, trading of futures contracts for agricultural commodities dates back to at least the 1850s.
Regulation
Managed futures accounts are regulated by the U.S. federal government, through the CTAs and CPOs advising the funds. Most all of these entities are required to register with the Commodity Futures Trading Commission and the National Futures Association and follow their regulations on disclosure and reporting.[8]
The 2010 enactment of the
References
- ^ "CFTC Glossary: Controlled account". Commodity Futures Trading Commission. Retrieved 16 May 2012.
- ^ "CTA Industry - Assets Under Management". Barclay Hedge. 2016. Retrieved 16 January 2017.
- ^ ISBN 978-1576603741. Retrieved 16 May 2012.
- ^ ISBN 978-0470637937. Retrieved 16 May 2012.
- ^ Valeyre, S. (2024). "Optimal trend-following portfolios". Journal of Investment Strategies. 12.
- .
- ^ Bhansali, V.; Davis, J.; Dorsten, M.; Rennison, G. (2015). "Carry and trend in lots of places". Journal of Portfolio Management.
- ^ ISBN 978-0470026632.
- ^ "Constructing a managed futures portfolio". Managed Futures Today. November 2010. Archived from the original on 18 July 2014. Retrieved 16 May 2012.
- ISBN 978-1576603741. Retrieved 16 May 2012.
- ISBN 978-0470637937. Retrieved 16 May 2012.
- ^ "Managed Futures Investing". Wisdom Trading.
- ^ Fischer, Michael S. (September 2010). "Under the investment radar". Private Wealth. Charter Financial Publishing Network Inc. Retrieved 16 May 2012.
- ^ "How Investors Lose 89 Percent of Gains from Futures Funds". Bloomberg.
- ^ a b Stassen, John H. (1982). "The Commodity Exchange Act in Perspective a Short and Not-So-Reverent History of Futures Trading Legislation in the United States". Washington and Lee Law Review. 39 (3). Washington & Lee University School of Law: 825–843. Retrieved 29 May 2012.
- ^ a b c "History of the CFTC". Commodity Futures Trading Commission. Retrieved 15 May 2012.
- ^ "Commodity Pool Operators and Commodity Trading Advisors: Amendments to Compliance Obligations" (PDF). Commodity Futures Trading Commission. 26 January 2011. Retrieved 14 May 2012.
- ^ "The CFTC's final entity rules and their implications for hedge funds and other private funds" (PDF). Sutherland. Sutherland Asbill & Brennan LLP. 10 May 2012. Retrieved 4 June 2012.[permanent dead link]
- ^ Dolmetsch, Chris; Schmidt, Robert (17 April 2012). "CFTC Sued By Fund Industry To Overturn Registration Rule". Bloomberg. Retrieved 5 June 2012.