Benefits of Managed Futures in a Balanced Portfolio

The Role of Alternative Investments in Portfolio Allocation

Alternative Investments, including hedge funds and managed futures, offer the potential to enhance returns and reduce volatility of traditional investment portfolios. Managed futures represent an important strategy used by investors to attempt to achieve non-correlated diversification in their portfolios.

Potential for Enhanced Portfolio Returns & Reduced Volatility Risk

Managed futures represent an industry comprised of professional money managers who manage client assets on a systematic and discretionary basis, investing in global futures and options markets. A managed futures fund is a pool of investment dollars traded in the futures markets by a Commodity Trading Advisor, or CTA.

As an asset class, managed futures can potentially enhance the returns and lower the volatility of traditional investment portfolios through exposure to the world’s commodity, interest rate, and currency markets. This offers investors the possibility to generate positive returns during periods of poor equity market performance. This reduction in volatility risk is substantiated by extensive academic research, beginning with the landmark study of Dr. John Lintner of Harvard University. Of course there is no guarantee that any strategy will be profitable or avoid losses or that the addition of managed futures to a portfolio will lower volatility or reduce risk. Past results are not necessarily indicative of future results.

"The combined portfolios of stocks (or stocks and bonds) after including judicious investments in leveraged managed futures accounts show substantially less risk at every possible level of expected return than portfolios of stock (or stocks and bonds) alone."
(Dr. John Lintner, "the Potential Role of Manged Futures Accounts in portfolios of Stocks and Bonds", 1983).

Proven Investment Performance

In addition to the benefits of diversifying a portfolio with non-correlated assets, returns from Managed Futures have compared favorably with those of US stocks and bonds.

Performance Comparison

PAST RESULTS ARE NOT NECESSARILY INDICATIVE OF FUTURE RESULTS.

Source: Managed Futures: International Traders Research, Inc. (an affiliate of Altegris); US Stocks: Standard and Poor's; US Bonds: Lehman Brothers Inc.

An investor cannot invest directly in an index. Moreover, indices do not reflect commissions or fees that may be charged to an investment product based on the index, which may materially affect the performance data presented. Past performance is not necessarily indicative of future results.

Diversify Risk

Diversify Risk by Including Managed Futures

Historically, advisors and investors have sought diversification through allocation among different classes of equities, fixed income investments and cash. In recent years, equities in both the US and abroad have become increasingly correlated, eroding the perceived diversification value of this methodology. Source: Based on correlation between MSCI EAFE and S&P 500 Total Return Indices (1986-2006)

Even savvy investment decisions to include diverse regions, sectors and capitalizations can fall short of ensuring that a traditional equity portfolio is well-diversified and efficient. Adding a managed futures program to the mix provides investors with an additional option. Academic research demonstrates that the inclusion of a managed futures component can help reduce overall portfolio risk while “enhancing portfolio returns in economic environments in which traditional stock and bond investment media offer limited opportunities.”Thomas Schneeweis and Georgi Georgiev, “The Benefits of Managed Futures," June 2002

Of course there is no guarantee that any strategy will be profitable or avoid losses or that the addition of managed futures to a portfolio will lower volatility or reduce risk. Past results are not necessarily indicative of future results.

Potential for Profit in Any Economic Environment

The beauty of managed futures is that Commodity Trading Advisors have the flexibility to position assets for profit, independent of market direction.

Managed futures trading advisors can take advantage of price trends, by purchasing futures positions in anticipation of a rising market or by selling futures positions if they anticipate a falling market. During deflationary trends, futures provide an opportunity to profit by selling into a declining market with the expectation of buying, or closing out the position, at a lower price. Managed futures programs are often considered to be a “long volatility” strategy, as they can take advantage of rapidly changing trends in the marketplace. Trading advisors can even use strategies employing options on futures contracts that allow for profit potential in flat or neutral markets. There is no guarantee that any strategy will make money or not lose money in any market environment.

This potential to profit from a variety of economic environments makes an investment in managed futures particularly attractive to some investors.

Global Diversification

Managed futures investments have the potential to help diversify a portfolio across different sectors of the market and geographies. CTAs and managed futures funds can participate in at least 150 different markets worldwide, including stock indices, financial instruments, agricultural and tropical products, precious and industrial metals, currencies, and energy products. Through an investment in managed futures, investors can participate in these global markets and potentially diversify their portfolios without having to monitor numerous complex international markets. Of course there is no guarantee that any strategy will be profitable or avoid losses or that the addition of managed futures to a portfolio will lower volatility or reduce risk. Past results are not necessarily indicative of future results.

Low Correlation

Low Correlation with Traditional Investments: Reduce Portfolio Volatility

A primary benefit of adding a managed futures component to a diversified investment portfolio is the potential to decrease portfolio volatility. This potentially lower volatility is a direct result of managed futures’ historically low to slightly negative correlation with traditional investments, including equities and bonds (see table below).

In part, low correlation results from the fact that managed futures programs can profit from both upward and downward directional moves in the assets underlying portfolio contracts. These programs also enhance diversity by providing exposure to global markets and non-traditional market segments, like agriculture or financial futures.

The key to realizing the benefits of diversification are realized only when asset classes in a given portfolio behave differently in various market conditions. The way these differences are evaluated is called correlation. If investments have a correlation of 1.0, then they behave in exactly the same way. If they have a correlation of -1.0, then they move in opposition to one another.

Adding managed futures to a portfolio creates the possibility to reduce overall volatility and potentially build a more stable portfolio. Of course there is no guarantee that any strategy will be profitable or avoid losses or that the addition of managed futures to a portfolio will lower volatility or reduce risk. Past results are not necessarily indicative of future results. You should be aware that correlations amongst asset classes change.

Pursue Desired Returns with Less Risk

The addition of managed futures to a portfolio creates the possibility to reduce downside risk in times of crisis in traditional markets. Research has found that, historically, many managed futures programs have exhibited low or even negative correlations with equity indices during months when equity returns have been negative and positive correlations during months when equity returns have been positive.

Average Rates of Return: US Stock Up Months

Last 60 Months

Average Rates of Return: US Stock Down Months

Last 60 Months

PAST RESULTS ARE NOT NECESSARILY INDICATIVE OF FUTURE RESULTS.

Source: Managed Futures: International Traders Research, Inc. (an affiliate of Altegris); US Stocks: Standard and Poor's; US Bonds: Lehman Brothers Inc.

Discretionary Management

Managed Futures Investments differ from traditional commodity index investing

Managed Futures programs invest client assets on a discretionary basis using global futures markets as an investment medium. They may participate in diverse markets—agriculture, currencies, financial instruments, securities, and others—throughout the world, buying and selling futures contracts in anticipation of pricing trends. When compared with long-only index investing in commodity futures, such as oil or precious metals, managed futures have distinct investment characteristics. Managed futures programs can take advantage of price trends, both up and down, in a variety of markets.

Unique Investment Management Talent

Managed futures programs, like other alternative investment funds, offer talented investment professionals the opportunity to pursue robust proprietary strategies, often employing diverse investment instruments, in a limited partnership environment. As an investment adviser, tapping into this expertise can help meet your clients' investment goals, risk tolerance, and time frames. Of course there is no guarantee that any strategy will be profitable or avoid losses or that the addition of managed futures to a portfolio will lower volatility or reduce risk. Past results are not necessarily indicative of future results.

We Work for Your Success

For more information about incorporating managed futures into your wealth management practice, we invite you to contact us at (888) 351-8485 or info@apmfunds.com.