What Is a Managed Futures Account?
A managed futures account is a type of alternative investment vehicle. It is similar in structure to a mutual fund, except that it focuses on futures contracts and derivative products.
In the United States, providers of managed futures accounts are regulated by the Commodity Futures Trading Commission (CFTC) as well as the National Futures Association (NFA).
Key Takeaways
- A managed futures account is a type of investment fund that holds futures, options, and derivatives.
- Such accounts are regulated by the CFTC and NFA, and their investment managers face additional oversight.
- The demand for managed futures accounts has grown in recent years, with assets under management (AUM) approaching $340 billion as of 2021.
- Managed futures accounts are aimed at institutional investors, but retail investors can invest in them through mutual funds.
- Managed futures accounts have a low correlation with more traditional assets, making them attractive sources of diversification.
Understanding Managed Futures Accounts
Managed futures accounts are investment vehicles that hold positions in derivatives, such as commodity futures, stock options, and interest rate swaps. Unlike more mainstream investment funds, managed futures accounts are permitted to use leverage in their transactions and can also take both long and short positions in the securities they trade.
Because of this added level of complexity, managed futures accounts are managed by specialized investment managers called Commodity Trading Advisors (CTAs). These professionals hold special designations which authorize them to trade in derivative securities. Although CTAs typically trade on behalf of individual clients, other investment managers— known as Commodity Pool Operators (CPOs)—invest in derivatives on behalf of a large group, or "pool," of investors.
Proponents of managed futures accounts argue that they can reduce portfolio volatility and offer greater capital efficiency due to the leverage that they permit. Moreover, because managed futures accounts can adopt both long and short positions, they can enable investors to generate profits in both bull and bear markets. Lastly, derivative investments can provide high levels of diversification through exposure to market sectors, such as commodities, currencies, and other financial instruments.
Detractors, on the other hand, cite the relative lack of long-term performance data on managed futures accounts and the relatively high fees that these accounts often entail.
1949
The date that the first publicly managed futures fund, Futures, Inc., was started.
Advantages and Disadvantages of Managed Futures Accounts
Managed futures accounts are frequently used by large institutions to diversify, reducing the risk profile and volatility of their portfolios. They have a low correlation with more traditional assets, meaning that a managed futures account is unlikely to be affected by a downturn in the equities or bond markets.
In addition, a managed futures fund can take both long and short positions, allowing them to make profits whether the market is rising or falling.
However, there are some drawbacks. Managed futures accounts are more speculative, meaning that they have greater risks than investing in an ordinary mutual fund. Because performance is self-reported, the published numbers for managed funds may be biased. They also tend to have higher fees, similar to the fee structure for the hedge fund industry.
Pros/Cons of Managed Futures Accounts
Pros
Low correlation with stock and bond markets.
Allow institutional investors to diversify against risk and volatility
Can take both long and short positions, allowing them to profit when the market is falling.
Cons
Managed futures accounts charge high fees compared to other funds.
Inherent biases due to the fact that fund performance is self-reported.
Managed futures accounts are more speculative than other funds.
Fees Associated With Managed Futures Accounts
Managed futures accounts have higher fees than retail funds. There are two fees to keep in mind. The first is the management fee, typically ranging up to about 3% of an account's total assets. The second is the "performance fee," where the CTA keeps a share of the profit gains. This is similar to the hedge fund industry's "2 and 20" fee structure.
How to Invest in a Managed Futures Account
While managed futures accounts are mainly geared to institutional investors, it is also possible for ordinary investors to access them. The easiest route for retail investors is through a mutual fund or ETF that invests in managed futures accounts.
These are similar to other kinds of funds that invest in a basket of securities. This allows ordinary investors to obtain a diversified collection of different accounts without much difficulty. As with other mutual funds, it is important to compare their expense ratios and performance history to make sure that you are investing your money wisely.
The fee structure for a typical managed futures account is significantly higher than most retail-oriented investment vehicles.
Special Considerations
Both CTAs and CPOs are required to register with the CFTC before accepting clients' funds. Additionally, they must pass extensive FBI background checks and file ongoing disclosure documents as well as annual audited financial statements. These financial disclosures are then reviewed by the NFA, the national self-regulatory organization (SRO) of the U.S. derivatives industry.
Managed futures accounts have seen increased institutional use in recent years. In the first quarter of 2021, total funds managed by the CTA industry were reported at $340 billion, according to figures published by Barclay Hedge Fund.
Globally, it is difficult to overstate just how large the derivative markets have become. According to data from the Bank for International Settlements (BIS), the total notional value of derivative contracts worldwide is over $582 trillion, or over six times the entire world's gross domestic product (GDP).
With that in mind, it is hardly surprising that a growing number of investors are pursuing investment opportunities within the derivative marketplace.
What Is Notional Funding?
Notional funding is a means of leveraging the value of a managed futures account. If a CTA requires a minimum investment of $100,000 for a managed futures account, an investor with only $50,000 can leverage their cash to meet the minimum. This increases the investor's risk, but also increases their potential returns.
What Is the Difference Between Managed Futures and Hedge Funds?
Hedge funds trade in a broad variety of securities, ranging from stocks and bonds to real estate and derivatives. A managed futures account only trades in exchange-cleared futures, options, and forward markets.
What Are Common Managed Futures Strategies?
Some CTAs seek to take a market-neutral strategy, with matching long and short positions within a particular industry. This strategy can generate returns from both rising and falling markets. Another strategy is trend trading, using different market signals and indicators to predict the overall momentum of the futures market.
