August 25th, 2008
A managed future, by their very nature, is a diversified investment opportunity. Commodity trading advisers have secured the ability to trade in over 150 different markets worldwide. Many managed future funds can further diversify by using several commodity-trading advisers with different trading approaches.
The benefits of managed futures funds within a well-balanced portfolio will include:
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* Potential for enhanced portfolio returns
* Ability to profit in any economic environment
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One of the primary benefits of adding a managed futures funds component to a diversified investment portfolio is that it just might decrease portfolio volatility risk. This risk reduction contribution to the portfolio is probably due to the low to slightly negative correlation of managed futures funds with equities and bonds. One of the key tenets of Modern Portfolio Theory, as developed by the Nobel Prize economist Dr. Harry M. Markowitz, is that more efficient investment portfolios will be created by diversifying among asset categories with a low to negative correlations.
While managed futures funds may decrease portfolio risk, they can also at the same time enhance overall portfolio performance. For example, adding managed futures funds to a traditional portfolio improves the overall investment quality. This is proven by an extensive bank of academic research, beginning with the a study of Dr. John Lintner of Harvard University, in which he writes that “the combined portfolios of stocks (or stocks and bonds) after including judicious investments… in leveraged managed futures funds accounts show substantially less risk at every possible level of expected return than those portfolios of stocks (or stocks and bonds) alone.”
Managed futures commodity trading advisers can take advantage of price trends. They can buy futures positions in anticipation of a rising market or they can sell futures positions if they anticipate a falling market. For example, during periods of hyperinflation, hard commodities like gold, silver, oil, grains, and livestock tend to do good, as do the major world currencies. During deflationary times, managed futures funds 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. Commodity trading advisers can use strategies employing options on managed futures contracts that allow for profit potential in flat or neutral markets.
The establishment of global futures exchanges and the accompanying increase in actively traded contract offerings has allowed commodity-trading advisers to diversify their portfolios by geography as well as by product. For example, managed futures funds accounts can participate in at least 150 different markets worldwide, including stock indexes, financial instruments, agricultural products, precious and nonferrous metals, currencies, and even energy products. Commodity trading advisers as a result, have many opportunities for profit potential and risk reduction among a broad array of non-correlated markets.