Managed Futures

Posted on by user

Managed Futures: Overview and How They Trade

What are managed futures?

Managed futures are professionally managed investment programs that trade futures contracts across multiple markets—commodities, energy, agriculture, interest rates, and currencies. Managed by commodity trading advisors (CTAs) or commodity pool operators (CPOs), these strategies are treated as alternative investments and are commonly used to diversify traditional stock-and-bond portfolios.

Why investors use them

  • Provide exposure to asset classes and market drivers not available in direct equity or bond holdings.
  • Tend to have low or negative correlation with traditional markets, helping reduce portfolio volatility.
  • Offer both directional and relative-value approaches that can perform in different market environments.

Regulation and background

Managed futures developed alongside regulatory definitions for CTAs and CPOs. In the U.S., CTAs and CPOs are overseen by the Commodity Futures Trading Commission (CFTC) and the National Futures Association (NFA). These regulators require reporting and audits, which has helped institutional investors view managed futures as a regulated alternative to traditional hedge funds.

How managed futures trade

Managed futures programs vary in market exposure and methodology. A diversified managed futures portfolio typically holds positions across several sectors (commodities, currencies, rates, etc.) and follows a stated trading program. Two common strategy types are:

  • Market-neutral strategies
  • Seek profit from spreads, arbitrage, or relative mispricings rather than market direction.
  • Often take offsetting long and short positions to reduce exposure to broad market moves.

  • Aim to generate returns with lower correlation to overall market direction.

  • Trend-following strategies

  • Identify and follow price trends using fundamental or technical signals.
  • Go long assets in uptrends and short assets in downtrends to capture directional moves.
  • Can produce gains in sustained market moves, both up and down.

Evaluating managed futures

When considering a managed futures investment, request and review the program’s disclosure documents. Key items to evaluate include:
– Detailed description of the trading strategy and markets traded
– Historical performance, including annualized returns and drawdowns
– Risk metrics (volatility, max drawdown, correlation to equities/bonds)
– Fees and liquidity terms
– Manager experience and regulatory filings

Role in a portfolio

Managed futures are primarily used for diversification and risk management. Because their returns often move independently of equities and bonds, they can:
– Reduce portfolio volatility
– Provide potential upside during periods when traditional markets decline
– Complement long-only equity and fixed-income exposures

Conclusion

Managed futures are a regulated, professional approach to trading futures across varied markets. By using market-neutral or trend-following strategies, they offer diversification benefits that can improve portfolio resilience. Proper due diligence—reviewing strategy details, performance history, risk measures, and fees—is essential before investing.