Managed Futures: Portfolio Diversification Opportunities


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Managed Futures: Portfolio Diversification Opportunities

  1. 1. Managed Futures:Portfolio Diversification Opportunities Enhance returns and lower overall volatility. Courtesy of Triton Capital Advisors
  2. 2. As the world’s leading and most diverse derivatives marketplace, CME Group is where theworld comes to manage risk. CME Group exchanges offer the widest range of global benchmarkproducts across all major asset classes, including futures and options based on interest rates,equity indexes, foreign exchange, energy, agricultural commodities, metals, weather and realestate. CME Group brings buyers and sellers together through its CME Globex® electronic tradingplatform and its trading facilities in New York and Chicago. CME Group also operatesCME Clearing, one of the largest central counterparty clearing services in the world, whichprovides clearing and settlement services for exchange-traded contracts, as well as for over-the-counter derivatives transactions through CME ClearPort®. These products and services ensurethat businesses everywhere can substantially mitigate counterparty credit risk in both listed andover-the-counter derivatives markets.Futures trading is not suitable for all investors, and involves the risk of loss. Futures are a leveragesinvestment, and because only a percentage of a contract’s value is required to trade, it is possibleto lose more than the amount of money deposited for a futures position. Therefore, traders shouldonly use funds that they can afford to lose without affecting their lifestyles. And only a portion ofthose funds should be devoted to any one trade because they cannot expect to profit on everytrade. All orders are entirely at your risk, and it will be your responsibility to monitor these orders.There are limitations to the protection given by stop loss orders therefore we give no assurancethat limit or stop loss orders will be executed, even if the limit price is met, in full or at all.
  3. 3. CME Group Managed Futures: Portfolio Diversification OpportunitiesWHAT ARE MANAGED FUTURES?The term managed futures describes an INVESTMENT UNIVERSEindustry comprised of professional moneymanagers known as commodity tradingadvisors (CTAs). These trading advisors TRADITIONAL ASSET CLASSES ALTERNATIVE ASSET CLASSESmanage client assets on a discretionarybasis using global futures markets as an Cash Hedge Funds Bonds Managed Futuresinvestment medium. Trading advisors Equities Private Equitytake positions based on expected profit Real Estate Credit Derivativespotential. Managed futures are an asset class in their own right, separate from traditional investments such as stocks and bonds. THE GROWTH OF THE MANAGED FUTURES INDUSTRYIn the last 10 years, 220 200assets under 180management for 160 USD (in billions) 140the managed futures 120 100industry have grown 80 60an unprecedented 40 20700%. 0 1988 1990 1992 1994 1996 1998 2000 2002 2004 2006 Source: Barclay Hedge, Ltd.Managed futures have been used successfully by investment management professionals For the purposes of this booklet, managed futures do not include futures accounts where futures are used in risk-management programs or hedge funds. Those funds may be used to dynamicallyfor more than 30 years. Institutional investors looking to maximize portfolio exposure adjust the duration of a bond portfolio or to hedge the currency exposure of a foreign equity portfolio.continue to increase their use of managed futures as an integral component of a well-diversified portfolio. With the ability to go both long and short, managed futures arehighly flexible financial instruments with the potential to profit from rising and fallingmarkets. Moreover, managed future funds have virtually no correlation to traditionalasset classes, enabling them to enhance returns as well as lower overall volatility.Recent growth in managed futures has been substantial. In 2002, it was estimated thatmore than $45 billion was under management by managed futures trading advisors. Bythe end of 2007, that number had grown to more than $200 billion. 1
  4. 4. BENEFITS OF MANAGED FUTURES CME Group Managed Futures Portfolio Diversification Opportunities CME Group Managed Futures Portfolio Diversification Opportunities CME Group Managed Futures Portfolio Diversification Opportunities By their very nature, managed futures The benefits of managed futures within a well-balanced portfolio include: provide a diversified investment 1. Potential to lower overall portfolio risk opportunity. Trading advisors can participate in more than 150 global 2. Opportunity to enhance overall portfolio returns markets; from grains and gold to 3. Broad diversification opportunities currencies and stock indices. Many funds 4. Opportunity to profit in a variety of economic environments further diversify by using several tradingBENEFITS OF MANAGED FUTURESof flexibility and discipline BENEFITS OF MANAGEDdue to a combination 5. Limited losses FUTURES advisors with different trading approaches.BENEFITS OFreduced In this example, the overall risk is MANAGED FUTURES by almost 82 percent from –41.0 percent to –7.5 percent and the return also increases almost 20 percent fromfutures ByBy their very nature, managed +7.4 their very nature, managed futures The benefits ofof managed futures within well-balanced portfolio include: The benefits managed futures within a a well-balanced portfolio include: percent a diversified investment mainly provide to anature, managed futures provide +8.9 percent. This isBy their very diversified investment The1. Potential to lower overall portfolio ris;k 1. Potential to lower overall portfolio ris;ka well-balanced portfolio include: benefits of managed futures within due to diversified investmentcan opportunity. Trading advisors can opportunity. Trading advisorsprovide athe lack of correlation and, in participate negative 150 global between 1.2. 2. Opportunity to enhance portfolio returnsopportunity. Trading 150 global markets; some cases,in in over correlationmarkets; participate over advisors can Potential to lowerenhance portfolio returns Opportunity to overall portfolio ris;kparticipate in and gold global markets; and 2.3. 3. Broad diversificationportfolio returns some grains over 150 to to currencies from ofgrains and gold currencies in from the portfolio components and Opportunity to enhance opportunities Broad diversification opportunities the grains and Many funds furthereven stock indices. gold to currencies anddiversify Broad diversification opportunitiesfrom stock indices. Many funds further diversified portfolio. There is diversify 3.4. 4. Ability to profit in variety of of economic environments Ability to profit in a a variety economic environmentsstockusing several trading advisors diversify negative correlation between stockswith by by using several funds further with indices. Many trading advisors and 4.5. 5. Flexibility and a varietycombine toto environments Ability to profit in discipline combine limit losses Flexibility and discipline of economic limit lossesbymanaged futures as the two markets move using several trading advisors with independently from each other. 5. Flexibility and discipline combine to limit losses CHART 4: OPTIMUM PORTFOLIO MIX (12/1985 – 02/2008) CHART 4: OPTIMUM PORTFOLIO MIX (12/1985 – 02/2008)CHART 4: OPTIMUM PORTFOLIO MIX (12/1985 – 02/2008) DIVERSIFIED PORTFOLIO COMPARISON OF A STOCKS ONLY VS. ANNUAL RETURNS AND MAX. DRAWDOWNS 20% 20% 10% 10% 7.4% 7.4% 8.9% 8.9% 33.3% 33.3% Managed Futures Managed Futures Dow Jones Dow Jones 20% 10% 0% 0% 7.4% 8.9% 33.3% Managed Futures Dow Jones 0%–10% –10% STOCKS STOCKS DIVERSIFIED DIVERSIFIED –7.5% –7.5% –10%–20% –20% DIVERSIFIED DIVERSIFIED ONLY ONLY PORTFOLIO PORTFOLIO PORTFOLIO PORTFOLIO –7.5% STOCKS STOCKS STOCKS DIVERSIFIED ONLY ONLY –20%–30% –30% DIVERSIFIED ONLY PORTFOLIO PORTFOLIO STOCKS ONLY –30% –40% –40% 33.3% 33.3% 33.3% 33.3% 40%40% 40%40% Nikkei 225225 Nikkei MSCI World MSCI World Stocks Stocks Bonds Bonds –40% –41.0% –41.0%33.3% 33.3% 40% 40%Nikkei 225 Correlation: Correlation: MSCI World Stocks Correlation: Correlation: Bonds –41.0% Return Annual Return Annual Dow Jones – Nikkei 225: Dow Jones – Nikkei 225: 0.420.42 Stocks – Managed Futures: Stocks – Managed Futures: –0.05 –0.05Correlation: – MSCI World: Correlation: Futures – Bonds: 0.23 Annual Drawdown Max. Return Max. Drawdown Dow Jones Dow Jones – MSCI World: 0.810.81 Managed Futures – Bonds: Managed 0.23Dow Jones – Nikkei 225: 225: 0.42 0.67 MSCI World – Nikkei 225: MSCI World – Nikkei 0.67 StocksBonds – Stocks: BondsManaged Futures: – – Stocks: –0.05 –0.07 –0.07 Max. DrawdownDow Jones – MSCI World: 0.81 Managed Futures – Bonds: 0.23MSCI World – Nikkei 225:CASAM CISDM CTA Equal Weighted; Bonds: JP Morgan Government Bond Global;–0.07 Bloomberg Managed futures: 0.67 Bonds – Stocks: Source: 2
  5. 5. CME Group Managed Futures: Portfolio Diversification Opportunities1. POTENTIAL TO LOwER OVERALL PORTFOLIO RISk One of the tenets of modernThe main benefit of adding managed futures to a balanced portfolio is the potential to portfolio theory, as developeddecrease portfolio volatility. Risk reduction is possible because managed futures can trade by Nobel prize-winningacross a wide range of global markets that have virtually no long-term correlation to most economist Professor Harrytraditional asset classes. Moreover, managed futures funds generally perform well during M. Markowitz, is that moreadverse economic or market conditions for stocks and bonds, thereby providing excellent efficient investment portfolios can be created by diversifyingdownside protection in most portfolios. among asset classes withCORRELATION OF SELECTED ASSET CLASSES* low to negative correlations. Adding a managed futures Managed futures Bonds U.S. stocks fund to a portfolio of Managed futures 1.00 0.30 –0.23 traditional stocks and bonds Bonds 0.30 1.00 –0.29 has the potential to reduce risk and improve performance. U.S. stocks –0.23 –0.29 1.00*Based on a 10-year period ending December 31, 20071) Managed futures: Barclay CTA Index;2) Bonds: Lehman Brothers Long-Term U.S. Treasury Index;3) U.S. stocks: S&P 500 Total Return Index;Source: BarclayHedge, Ltd.2. OPPORTUNITY TO ENHANCE OVERALL PORTFOLIO RETURNSWhile managed futures can decrease portfolio risk, they can also OPTIMUM PORTFOLIO MIX (01/1987 – 02/2008)*simultaneously enhance overall portfolio performance. The following RETURN P.A. 12%chart illustrates that adding managed futures to a traditional portfolio 100% Managed Futures 11% 20% Managed Futuresimproves overall investment quality while also potentially reducing risk. 40% Stocks 10%This has been substantiated by an extensive bank of academic research, 40% Bonds Increase returns 9%beginning with the landmark study by Dr. John Lintner of HarvardUniversity in which he wrote: “… the combined portfolios of stocks 8% 50% Bonds(or stocks and bonds) after including judicious investments … in 7% 50% Stocksleveraged managed futures accounts show substantially less risk at VOLATILITY 6% 7% 8% 9% 10% 11% 12%every possible level of expected return than portfolios of stocks Reduce risk(or stocks and bonds) alone.” 1 *1) Managed futures: CASAM CISDM CTA Equal Weighted; 2) Stocks: MSCI World; 3) Bonds: JP Morgan Government Bond Global; Source: Bloomberg Including up to 20 percent of total investments in managed futures funds enhances portfolio diversity and therefore promotes greater independence from general market moves.1 Lintner, John, “The Potential Role of Managed Commodity Financial Futures Accounts (and/or Funds) in Portfolios of Stocks and 3 Bonds,” Annual Conference of Financial Analysts Federation, May 1983.
  6. 6. CME Group Managed Futures Portfolio Diversification Opportunities 3. BROAD DIVERSIFICATION OPPORTUNITIES3. Broad diversification MANY DIFFERENT FUTURES MARKETS MANY DIFFERENT FUTURES MARKETS opportunities Managed futures are highly flexible financial instruments traded on many regulated Managed futures are highly flexible financial instruments traded on many regulated financial and commodity markets around the world. By broadly diversifying across financial and commodity markets around the world. By broadly diversifying across global markets, managed futures can simultaneously profit from price changes in stock, global markets, managed futures can simultaneously profit from priceas well as from diverse commodity markets having bond, currency and money markets, changes in stock, bond, currency and money markets, as well no from diverse commodity markets having virtually as correlation to traditional asset classes. virtually no correlation to traditional asset classes. DIVERSIFICATION OF FUTURES MARKETS FX (4%) Interest Rates (44%) Australian Dollar Japanese Yen 1-Month LIBOR 10-Year U.S. Treasury Note International futures Brazilian Real Korean Won 30-Day Federal Funds 30-Year U.S. Treasury Bond British Pound Mexican Peso Eurodollar CME 10-Year Swap Rate Futures exchanges are continuing Canadian Dollar New Zealand Dollar Euroyen Chinese Renminbi Swiss Franc to adapt to growing Euro FX Individual Equity (9%) consumer demand Metals (4%) Deutsche Telekom Copper Allianz with more and more Palladium SAP Platinum Deutsche Bank new futures contracts Munchener Ruckversicherung Energy (6%) Banco Comercial Portugues Stock Futures entering the market. In Brisa Autoestradas de Portugal Stock Futures Ethanol Crude Oil recent years, futures Equities (24%) Natural Gas contracts were issued on Commodities (9%) Bovespa MSCI EAFE Corn Rough Rice Frozen Pork Bellies CAC 40 MSCI Emerging Markets ethanol, water and even Dax S&P MidCap 400 Oat Soybean Random Length Lumber Wood Pulp Lean Hogs S&P-GSCI Dow S&P 500 the weather. euro stoxx50 S&P SmallCap 600 Wheat Butter Livestock Hang Seng The above list is only a partial list of the futures products currently available around the world. Source: FIA 2007 LONDON FRANKFURT CHICAGO PARIS BUSAN DALIAN NEW YORK TOKYO SHANGHAI MEXICO MUMBAY (BOMBAY) SÃU PAULO SYDNEY 4
  7. 7. CME Group Managed Futures: Portfolio Diversification OpportunitiesEASE OF GLOBAL MOST ACTIVELY-TRADED FUTURES CONTRACTSDIVERSIFICATION NORTH AMERICA ASIA EUROPEThe substantial growth of futures CME Group Dalian Commodity Exchange London International Financial (DCE) Futures and Options Exchangeexchanges across the globe afford trading Corn (LIFFE) Soybeans No.1 Soybeansadvisors countless opportunities to SoyMeal 3-Month Sterling 30-Year Treasury Bonddiversify their portfolios by geographic 3-Month Euribor 10-Year Treasury Note Tokyo Commodity Exchange Long Giltmarkets, as well as by product. Trading E-mini Dow Jones (TOCOM) FTSE 100 Indexadvisors thus have ample opportunity for Eurodollar Gold All Futures on Individual Euro FX Gasoline Equitiesprofit potential and risk reduction among E-mini S&P 500 Index National Stock Exchange of London Metal Exchange (LME)a broad array of non-correlated markets. E-mini NASDAQ-100 India (NSE) High Grade Primary AluminumInvesting in managed futures on a global Light, Sweet Crude Oil S&P CNX Nifty Index Copper – Grade A Natural Gas All Futures on Individualscale provides protection against geo- Gold Equities International Petroleumspecific variables such as poor weather or Unleaded Gasoline Exchange (IPE) korea Futures Exchangepolitical unrest, which could affect some (kOFEX) Brent Crude Oil Mexican Derivatives Exchangecommodities or financial futures more (MexDer) KOSPI 200 ParisBourse (formerly TIIE 28 MATIF and MONEP)than others. AUSTRALIA Copper SOUTH AMERICA Eurex (formerly DTB Sydney Futures Exchange (SFE) and SOFFEX) Bolsa de Mercadorias & 3-Year Treasury Bonds Dax Futuros (BM&F) DJ Euro Stoxx 50 U.S. Dollar Euro-BUND One-Day Inter-Bank Deposit Euro-BOBL Euro-SCHATZ Source: FIA 2007 5
  8. 8. cmegroup.com4. OPPORTUNITY TO PROFIT IN A VARIETY OF ECONOMIC ENVIRONMENTSManaged futures trading advisors can MANAGED FUTURES VS. A TRADITIONAL PORTFOLIO DURING STOCK MARKET DECLINESgenerate profit in both increasing or 8% Managed futuresdecreasing markets due to the their ability Traditional portfolio of 6% 50% stocks and 50% bondsto go long (buy) futures positions in 4%anticipation of rising markets or go short 2%(sell) futures positions in anticipation 0%of falling markets. Moreover, trading MAR 01 OCT 87 AUG 88 AUG 90 SEP 90 AUG 97 JAN 00 FEB 01 SEP 01 MAR 90advisors are able to go long or short with –2%equal ease. This ability, coupled with –4%their virtual non-correlation with most –6%traditional asset classes, have resulted in –8%managed futures funds performing well Managed futures: CASAM CISDM CTA Equal Weighted; Stocks: MSCI World;relative to traditional asset classes during Bonds: JP Morgan Government Bond Global; Time scale: 01/1987 – 02/2008adverse conditions for stocks and bonds. WHEN CRITICAL EVENTS OCCUR (01/1984 – 02/2008)For example, during periods of +1600%hyperinflation, hard commodities such Long-Term Capital Management lost $4.6 billion (1998) +1200%as gold, silver, oil, grains and livestock +1000% +800%tend to do well, as do the major world MANAGED FUTURES +600%currencies. Conversely, during deflationary Black Monday +400%times, futures provide an opportunity to September 11, 2001profit by selling into a declining market U.S. STOCKS +200%with the expectation of buying, or closingout the position, at a lower price. Tradingadvisors can even use strategies employing Persian Gulf War (1990)options on futures contracts that allow for 0%profit potential in flat or neutral markets. 1984 1986 1988 1990 1992 1994 1996 1998 2000 2002 2004 2006 2008This ability to accommodate and Managed futures: CASAM CISDM CTA Equal Weighted; Stocks: Dow Jones Index; Logarithmic scale; Source: Bloombergprotect against unpredictable eventscan be invaluable in today’s volatile As the above chart shows, during the stock market crash in 1987, panic hit theglobal markets. stock markets following the largest one-day loss in history. Managed futures reported above 20 percent returns. Similarly after the terrorist attacks of 9/11, the stock market plummeted 16.3 percent. In contrast, managed futures gained 8.3 percent in the same period.6
  9. 9. CME Group Managed Futures: Portfolio Diversification Opportunities5. LIMITED LOSSES DUE TO A COMBINATION OF FLEXIBILITY AND DISCIPLINEPOTENTIAL TO LIMIT WORST DRAWDOWNS IN COMPARISON S&P 500DRAWDOWNS Managed Dow Jones Total Return MSCI World FTSE 1000 DAX Nikkei 225 NASDAQ Comp Futures (index) (index) (index) INDEX (index) (index) (index)Drawdowns, or the reduction a fund might 0%experience during a market retrenchment, –10%are an inevitable part of any investment. –20%However, because managed futures –30%trading advisors can go long or short – and –40%typically adhere to strict stop-loss limits – –50%managed futures funds have limited their –60%drawdowns more effectively than many –70%other investments. As the following chart –80%shows, drawdowns for managed futures –90% Managed futures: CASAM CISDM CTA Equal Weighted; Time scale: 11/1990 – 02/2008; Source: Bloomberghave been less steep than those for majorglobal equity indices. The chart above shows the worst historic drawdowns for each of the indices from 11/1990 through 02/2008. DRAWDOWN DURATIONS IN COMPARISONABILITY TO RECOVER QUICKLY 1990 1992 1994 1996 1998 2000 2002 2004 2006 2008Additionally, managed futures generally 0% –5%have shorter recovery times from –10%drawdown periods. This is due in part MANAGED FUTURES –15%to the ability to use short trading to take 01/1992 – 04/1992: –9.3% –20%advantage of falling markets, as well as the –25%fact that managed futures often have lower –30%losses to recover. –35% STOCKS 09/2000 – 09/2002: –44.7% –40%Unable to use short trading to take –45%advantage of falling markets, traditionalstock indices may experience extremedrawdowns in bear markets. Withreference to the previous chart, themaximum drawdown for stocks was–44.7 percent during the period of09/2000 through 09/2002. It takesmuch longer to make up for such largedrawdowns. To simply recover, the stockindex needed to regain almost 80 percentof its new low level. 7
  10. 10. cmegroup.comTHE EFFICIENCIES AND PERFORMANCEOF FUTURES MARKETSWhile managed futures are new to some, banks, corporations and Without speculators, price discovery would only occur whenmutual fund managers have used futures markets to manage their both a producer and an end user want to execute a transactionexposure to price change for decades. Futures markets make it at the same time. When speculators enter the marketplace, thepossible for these companies “to hedge” or transfer their risk to number of ready buyers and sellers increases and hedgers are ableother market participants, including speculators, who assume this to execute larger orders at their convenience without effecting arisk in anticipation of making a profit. dramatic change in price – providing additional liquidity, which helps ensure market integrity. By selling futures when prices are rising and purchasing as prices fall, their activity can have a stabilizing effect in volatile markets. COMPARISON OF PERFORMANCE (01/1980 – 07/2010) +7,000% Managed Futures1 +6,000% $600,680 +5,000% +4,000% U.S. Stocks2 $215,843 +3,000% +2,000% +1,000% International Stocks3 $74,376 0% 1980 1981 1982 1983 1984 1985 1986 1987 1988 1989 1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 1) Managed futures: CASAM CISDM CTA Equal Weighted; 2) U.S. stocks: S&P 500 Total Return; 3) International stocks: MSCI World; Source: Bloomberg; All material is property of MSCI. Use and duplication subject to contract with MSCI. Over the past 27 years, managed futures have outperformed almost every other asset class, including high-performing S&P 500 Total Returns.Looking back over the past few decades, managed futures have Allocating the same amount to a basket of international equitiesconsistently outperformed other asset classes such as stocks and reflecting the Morgan Stanley Capital International Index ofbonds. Consider an initial investment of $10,000 invested in world stocks, the initial investment would have grown to nearly1980. If placed in a U.S. stock fund mirroring the S&P 500, the $120,000. But the same investment in managed futures, based oninvestment would have been worth approximately $288,000 as of the Center for International Securities and Derivatives Marketsearly 2008. weighting, would now be worth more than $513,000.8
  11. 11. CME Group Managed Futures: Portfolio Diversification OpportunitiesMANAGED FUTURES TRADING STRATEGIESFund managers’ investment strategies tend employ discretionary systems based on Market-neutral traders tend to seek profitto fall into one of two primary categories: fundamental data and the discretion of from spreading between different financialthe major group is known as trend the fund manager, the majority use fully and commodity markets (or differentfollowers, while the other is comprised of automated technical trading systems based futures contracts in the same market).market-neutral traders. on a highly objective, disciplined set of Also in the market-neutral category are rules predefined by the fund management. option-premium sellers who use delta-Many trend followers use proprietary By removing human emotion, such as neutral programs. Both spreaders andtechnical or fundamental trading fear and greed, from trading decisions, premium sellers aim to profit from non-systems which provide signals of when fully automated trading systems rely on directional trading go long or short in anticipation of predetermined stop-loss orders to limitupward or downward market moves losses and let profits run.(trends). While some trend followersTYPES OF INVESTMENT OPPORTUNITIESA) Retail or public pools B) Individual accounts C) Private poolsThe recent introduction of low minimum- Individual accounts are customized Private pools combine money from severalinvestment levels for retail funds or public accounts for institutional investors or high investors and usually take the form of apools provides a way for small investors net-worth individuals. These funds usually limited partnership. Most of these poolsto participate in an investment vehicle require a substantial capital investment so have minimum investments that can beformerly exclusive to large investors. the advisors can diversify trading among as high as $250,000. These accountsIn the United States, fund managers’ a variety of market positions according to usually allow for admission andbusiness conduct and trading activities the investors’ specifications. For example, redemption on a monthly or quarterlyare supervised by the Commodity Futures certain markets may be emphasized or basis. The main advantage of privateTrading Commission (CFTC) and the excluded. Contract terms may include pools is the economy of scale that can beNational Futures Association (NFA). In specific termination language and achieved for mid-sized investors.addition, offerings of managed futures financial management requirements. Each of these alternatives may befunds to the general public are regulated structured with multiple trading advisorsby the CFTC, NFA, the Securities and with different trading approaches,Exchange Commission (SEC), the providing the investor with maximumFinancial Industry Regulatory Authority diversification.(FINRA) and individual state regulatoryagencies. Public managed futuresfunds must be audited by independentaccount firms and follow strictdisclosure requirements. 9
  12. 12. cmegroup.comPARTICIPANTS IN THEMANAGED FUTURES INDUSTRYThere are several types of industry participants qualified to assist interested investors. Keep in mind that any of these participants may,and often do, act in more than one capacity.Commodity Trading Advisors Futures Commission Merchants Investment Consultants can be(CTAs) are responsible for the actual (FCMs) are the brokerage firms that a valuable resource for institutionaltrading of managed accounts. There are execute, clear and carry CTA-directed investors interested in learning aboutapproximately 1,750 CTAs registered with trades on the various exchanges. Many managed futures alternatives and inthe NFA, which is the self-regulatory of these firms also act as commodity pool helping implement a managed fundorganization for futures and options operators and trading managers, providing program. They can assist in selecting themarkets. The two major types of advisors administrative reports on investment type of fund program and managementare technical traders and fundamental performance. Additionally, they may offer team that would be best suited for thetraders. Technical traders may use customers managed futures funds to help specific needs of the institution. Somecomputer software programs to follow diversify their portfolios. consultants also monitor day-to-daypricing trends and perform quantitative trading operations (e.g., margins and dailyanalyses. Fundamental traders forecast Commodity Pool Operators (CPOs) mark-to-market positions) on behalf ofprices by analysis of supply and demand assemble public funds or private pools. In their institutional clients.factors and other market information. the United States, these are usually in theEither trading style can be successful and form of limited partnerships. There are Trading Managers are availablemany advisors incorporate elements of approximately 1,250 CPOs registered with to assist institutional investors inboth approaches. the NFA. Most CPOs hire independent selecting CTAs. These managers have CTAs to make trading decisions. CPOs developed sophisticated methods of may distribute their funds directly or analyzing CTA performance records act as wholesalers to the broker-dealer so they can recommend and structure community. a portfolio of trading advisors whose historic performance records have a low correlation with each other. These trading managers may develop and market their own proprietary products or they may administer funds raised by other entities, such as brokerage firms.10
  13. 13. CME Group Managed Futures: Portfolio Diversification OpportunitiesEVALUATING RISK FROMAN INVESTOR’S PERSPECTIVEAs with any investment, there are risks associated with trading futures and options on Managed Futures Indexesfutures. The CFTC requires that prospective customers be provided with risk-disclosure (Actively Managed):statements, which should be carefully reviewed. Past performance is not necessarily an • Barclay CTA Indexindicator of future results. • MLM (Mount LucasWhen choosing a managed futures fund, it is important to ensure the fund manager has Management) Indexa proven track record. Before investing, it is also advisable to check the magnitude and • CISDM Managed Futuresduration of the fund’s worst drawdown, or cumulative loss in value from any peak in Benchmark Seriesperformance to the subsequent low. In addition, there are several indices that measuremanaged futures performance. Investors may wish to consult each index to determine Commodity Market Indexeswhich provides the most appropriate performance criteria for their needs. At right is a (Passive):list of some of the more familiar indexes. • Goldman Sachs Commodity Index (GSCI) • Dow Jones-AIG Commodity Index (DJ-AIGCI) • Reuters-CRB Total Return IndexHOw FEES ARE STRUCTUREDFOR MANAGED FUTURESTotal management fees in the managed under management, in addition to a account are netted before the investor isfutures industry tend to be higher than performance “incentive” fee based on charged a performance fee. The tradingthose in the equity markets. While profits in the account. The performance manager assumes the netting risk bymanagement fees do vary according to fee is almost always calculated net of all paying each CTA according to his or herthe type of managed futures account and costs to the account, such as management individual performance.may be negotiable, a general fee structure fees and commissions. The performanceexists. Investors should fully understand fee is thus based on net trading profits, In addition to management andthat performance information for a which are usually paid only if the account performance fees, an account or fundmanaged futures account or fund is almost or fund exceeds previously established net pays transaction costs or brokeragealways expressed net of all such fees. asset values. commissions. These expenses reflect the cost of executing and clearing futuresTypically, the trading advisor or trading A few trading managers assume the trades and generally are calculated on amanager is compensated by receiving “netting risk,” whereby the performance per-round-turn basis.a flat management fee based on assets results of all trading advisors in the 11
  14. 14. cmegroup.comINVESTOR SAFETY IS PARAMOUNTIN THE FUTURES MARKETProtecting the interests of all participants in the futures market is the responsibility of exchange and industry members as wellas federal regulators. Working together, they ensure the financial and market integrity required by investors. A brief overview ofCME Clearing will illustrate why the credit risk of exchange-traded products is minimal for futures investors.The market integrity of … Combined with the financial merely executes an equal and oppositeCME Group … integrity of CME Clearing transaction, usually with an entirelyCME Group rules and regulations are Clearing operations are another different party, and ends up with a netdesigned to support competitive, efficient mechanism used by exchanges to uphold zero position.and liquid markets. These rules and the integrity of the futures markets. One of the most important financialregulations are reviewed continuously CME Clearing 1) acts as a guarantor safeguards in ensuring performance onand are periodically amended to reflect to clearing member firms for trades it futures contracts is the performance bond,the needs of market users. Making sure maintains; 2) reconciles all clearing which is a deposit clearing member firmsthat trading practices and regulations member firm accounts each day to ensure must post and maintain against theirare followed is the responsibility of the that all gains have been credited and all open positions. These performance bonds,exchange’s Market Regulation and Audit losses have been collected; and, 3) sets and also referred to as margins, are set byDepartments, which work to prevent adjusts clearing member firm margins for CME Clearing based on each irregularities and investigate changing market conditions. Your broker may require a larger depositpossible violations of exchange and CME Clearing settles the account of each for your account.industry regulations. The departments member firm at the end of the tradingprovide daily on-site surveillance of CME Clearing settles its accounts daily. day, balancing quantities of contractstrading activity, continuous monitoring As closing or settlement prices change bought with those sold. In clearing trades,of member firms’ trading practices with the value of outstanding futures positions, the clearinghouse substitutes itself asstate-of-the-art technology and prompt, the clearinghouse collects from those the opposite party in each transaction,thorough investigations of any customer who have lost money as a result of essentially eliminating counterpartycomplaints. price changes and credits those funds credit risk. It interposes itself as the buyer immediately to the accounts of those to every seller and the seller to every who have gained. Thus, before each buyer and becomes, in effect, a party trading day begins, all of the previous day’s to every clearing member transaction. losses have been collected and all gains Because of this substitution, it is no have been paid or credited. In this way, longer necessary for a buyer (or seller) to CME Clearing maintains very tight find the original seller (or buyer) when control over performance bonds as prices offsetting a position. A market participant fluctuate, ensuring that sufficient money is on deposit at all times.12
  15. 15. For more information:About the futures marketCME Group is dedicated to helping investors learn more about the benefits of using the futures market. Itoffers a wide variety of educational publications and research materials that can be reviewed and ordered onlineat managed futuresContact the sources listed here for information about other topics related to managed futures: RESEARCH ANDREGULATORY AGENCIES INDUSTRY ASSOCIATIONS REPORTING SERVICESCommodity Futures Trading Commission Futures Industry Association (FIA) Barclay Hedge Ltd.Three Lafayette Centre 2001 Pennsylvania Avenue NW 2094 185th Street, Suite 1B1155 21st Street, NW Suite 600 Fairfield, IA 52556Washington, D.C. 20581 Washington, D.C. 20006-1807 641 472 3456202 418 5000 202 466 5460 Fax: 641 472 9514Fax: 202 418 5521 Fax: 202 296 3184 Center for International SecuritiesNational Futures Association (NFA) Managed Funds Association (MFA) and Derivatives Markets (CISDM)300 South Riverside, Suite 1800 2025 M Street NW, Suite 610 Isenberg School of ManagementChicago, IL 60606-6615 Washington, D.C. 20036-3309 University of Massachusetts312 781 1300 202 367 1140 121 Presidents DriveFax: 312 781 1467 Fax: 202 367 2140 Amherst, MA 413 577 3166 Fax: 413 577 1350 www.cisdm.orgFor information on the performance of public managed futures funds, go to Futures Magazine’s “Public Funds Summary”at trading is not suitable for all investors, and involves the risk of loss. Futures are a leveraged investment, and because only a percentage of a contract’s value is required to trade, it is possible to losemore than the amount of money deposited for a futures position. Therefore, traders should only use funds that they can afford to lose without affecting their lifestyles. And only a portion of those fundsshould be devoted to any one trade because they cannot expect to profit on every trade.All references to options refer to options on futures.CME Group is the trademark of CME Group, Inc. The Globe logo, Globex® and CME® are trademarks of Chicago Mercantile Exchange, Inc. CBOT® is the trademark of the Board of Trade of theCity of Chicago.NYMEX, New York Mercantile Exchange, and ClearPort are trademarks of New York Mercantile Exchange. Inc. COMEX is a trademark of Commodity Exchange, Inc.All other trademarks are the property of their respective owners.“S&P 500®,” “S&P Asia 50®,” “S&P MidCap 400®” and “S&P SmallCap 600®” are trademarks of The McGraw-Hill Companies, Inc., used under license. MSCI® and EAFE® are trademarks of MSCI,used under license.NASDAQ-100® is a registered trademark of the Nasdaq Stock Market, Inc. and is licensed for use by the Chicago Mercantile Exchange Inc.“Dow Jones” “AIG,” “Dow Jones-AIG Commodity Index” and “DJ-AIGCI” are registered trade marks or service marks of Dow Jones & Company, Inc. and American International Group, Inc. (AIG). ,MLM Index is a trademark of Mount Lucas Management Corporation.This information has been compiled by CME Group for general purposes only. CME Group assumes no responsibility for any errors or omission. Additionally, all examples in this brochure are hypotheticalsituations, used for explanation purposes only, and should not be considered investment advice or the results of actual market experience.All matters pertaining to rules and specifications herein are made subject to and are superseded by official CME, CBOT and CME Group rules. Current rules should be consulted in all cases concerningcontract specifications.Copyright © 2010 CME Group. All rights reserved.
  16. 16. CME GrouP hEadquartErs CME GrouP rEGIoNaL oFFICEs20 South Wacker Drive New York London singaporeChicago, Illinois 60606 800 331 3332 212 299 2000 +44 20 7796 7100 +65 6593 312 930 1000 Calgary houston são Paulo 403 444 6876 713 658 9292 +55 11 2565 5999 tokyo Washington d.C. +81 3 5403 4828 202 638 3838 HF163/3.5M/0311