“Location, location, location,” is the well-known adage that underlines investing in real estate. And that’s because buyers need to protect their investment after making such a large outlay of funds.
But when building an investment portfolio, perhaps “diversification” is the watchword to emphasize. Why? Because it’s one of the best-known ways to reduce your financial risk and enhance wealth.
There are many paths to diversification, but savvy investors are increasingly considering a managed account to achieve this. Commodity futures trading can bring financial stability, along with enhanced returns, to a well-managed portfolio. Investors must, of course, carefully evaluate their financial position and talk to their financial advisor before making major decisions on investment allocations.
Diversifying a portfolio dominated by traditional investment vehicles such as stocks and bonds can be a smart, defensive move. And being defensive is vital with today’s rapid globalization of financial markets — with all the benefits and uncertainties that brings.
What Are Managed Futures?
This practice is a three-decade-old sector that involves investing in pools headed by a specialist known as a Commodity Trading Advisor. A CTA, which can be an individual or a firm, is required to register with the federal Commodity Futures Trading Commission.
With such a program, an investor can defer to an experienced trading advisor to diversify into the world of futures, such as stock indices, debt instruments, currencies, energy, metals and agriculture commodities.
“It’s one of the best product lines no one knows about,” said Ken Packard, Chief Sales and Marketing Officer at Daniels Trading.Packard said deploying 5 to 20 percent of your portfolio into a managed account may smooth out your equity value curve and “can actually enhance your returns.”
Another reason to consider this strategy is to realize returns in any kind of economic environment, whether bull or bear. “Managed Futures may do well in down markets because they employ short-selling and options strategies that allow them to profit in such markets,” according to a backgrounder produced by the CME Group.
CTAs can range the world for returns by accessing more 150 liquid futures products internationally. All the trades are undertaken on regulated futures exchanges, however.
This strategy does have a solid academic underpinning. Dr. John Lintner, a Harvard professor, delivered a seminal paper on the subject at a conference in Toronto in 1983 that found traditional portfolios were all the stronger by adding managed accounts into their holdings.
The CME recently released its own paper that concluded that the Harvard professor’s theories have stood the test of time. “It is remarkable just how solid his argument has remained over the past 25 years,” the paper stated. In fact, Managed Futures was one of the bright spots during the financial meltdown in 2008, according to the CME paper.
There are financial risks to commodity futures trading, just like there are with any investment. The CFTC mandates that risk-disclosure statements must be provided to potential customers, and these need to be carefully reviewed by the investor.
It’s important to know that a fund’s past performance is no guarantor of future results. Nevertheless, an investor should only choose a fund manager with a proven track record. An investor should also examine a fund’s so-called peak to valley drawdown. In other words, an investor should study a big loss and how long it takes for the fund to recoup the loss.
A final note, management fees in the sector tend to be higher than in equity markets.
In summary, this strategy may well have a place in a well-managed and diversified portfolio. A futures specialist at Daniel’s Trading can take you on a guided tour if you would like to learn more about initiating a Managed Futures program.