What are Managed Futures?

Managed futures accounts are a type of account that hold futures contracts, futures options, and sometimes government securities futures. These accounts can hold futures contracts in commodities, currencies, and interest rates, as well as in equities. A managed futures account is considered to be an alternative investment, making it suitable for a sophisticated investor with a deep understanding of futures trading. Managed futures are considered to be some of the original hedge funds.

Managed futures accounts are similar to mutual funds in that they are essentially a basket of investments that are closely monitored, and underperforming assets are liquidated and replaced with assets that are expected to have better performance. A professional who manages an account of this type is called a commodity trading adviser. Commodity trading advisers may earn a percentage of the total size of the account he manages, or he may receive a percentage of the profits for his work. The assets that are included in these accounts are very liquid and highly regulated, and the advisers who trade them are very closely scrutinized by regulators. In the United States, these advisers must register with the Commodity Futures Trading Commission (CFTC), which is part of the National Futures Association (NFA).

While they may have some similarities, the major difference between managed futures accounts and mutual funds is that managed futures accounts can hold long and short positions in futures, as well as options on futures contracts. Mutual funds cannot hold short positions or options, and they cannot hold positions in futures markets. The commodity trading advisers who manage these funds tend to participate in short-term trading, which is another difference between them and mutual funds.

The strategies used to manage these types of accounts can be complex and varied. Many managers use trend following, which tracks the trends of the available investments. The manager buys those futures that are marking new high prices and sells those that are marking new low prices. Some managers also consider fundamental analysis of the underlying assets, write options to hedge positions, or employ arbitrage strategies.

Managed futures tend not to correlate with traditional investments, like mutual funds, stocks, and bonds. For the sophisticated investor, this can reduce volatility in the overall portfolio. For example, the return on stocks and bonds tends to decline during periods of inflation, while managed futures tend to have higher returns during the same period of time.