Should I be considering managed futures?
Many beginning futures traders struggling to make money find themselves asking this question. However, the answer isn’t as simple as yes or no because not all managed futures programs are created the same. For instance, there can be significant differences in risk and reward profiles among various types of managed futures accounts. Believe it or not, there are some managed programs out there that rarely make money; yet those coming off “hot” years with high double digit returns are likely trading in a manner that could translate into massive draw-downs the following year. Thus, it is important to do your homework before putting money to work in managed futures to ensure the program you choose fits your personality and portfolio.
In general, when referring to managed futures we are speaking of Commodity Trading Advisors (CTAs) registered as such with the NFA (National Futures Association). These are programs that are regulated, and face strict rules dictating the methods of reporting performance to the public. Still, you shouldn’t confuse being registered and regulated as being vetted, successful, or a safe investment. The bar set to become a CTA is relatively low; in a nutshell, one can become a CTA with the passing of a proficiency exam and a registration fee. Regulators don’t analyze the trading strategy, or market risk, they merely confirm the CTA is following CFTC rules on items such as marketing, risk disclosure, and fair trade allocation among participating accounts. In other words, when it comes to vetting it is up to you and your broker.
The benefit of investing in a CTA to participate in the futures, and options on futures, markets will vary widely according to your choice in program. Nevertheless, the perceived advantages to allocating a small portion of an investment portfolio toward managed futures are diversity and, hence, lower overall portfolio volatility.