As global stock markets tumbled during late 2008 many investors witnessed staggering losses in their IRA’s and 401K’s. However, not all investors were that unfortunate; some actually prospered reaping returns of +25% or more for 2008.
What did these investors know that you may have overlooked? Professionally managed futures and foreign exchange.
What are Managed Futures and Foreign Exchange?
The terms Managed Futures and Managed Foreign Exchange describes an industry made up of professional asset managers known as Commodity Trading Advisors (CTA) and Commodity Pool Operators (CPO).
Investment management professionals and sophisticated investors have been utilizing these investment instruments for over 30 years.
With practically a zero correlation to stocks and other traditional asset classes, one of the most attractive features of managed futures and foreign exchange investments is the ability of these asset classes to add profound diversification to an overall investment portfolio.
Benefits of Managed Products?
With little or no correlation to stocks, being one of the main benefits of managed futures and foreign exchange some others include:
-Ability to possible profit in rising and falling market environments.
-Reduced portfolio volatility.
-Provide return in economic environments in which traditional stock and fixed income investments offer limited -Return opportunities.
-Both individual managed accounts as well as pooled investments .
-Minimum investment sizes can be as low as $1000 in some fund based solutions.
CTA Performance Index (Average Performance of a Basket of Commodity Trading Advisors)
1980 (+) 63.69% 1990 (+) 21.02% 2000 (+) 7.86% 1981 (+) 23.9% 1991 (+) 3.73% 2001 (+) 0.84% 1982 (+) 16.68% 1992 (-) 0.91% 2002 (+) 12.36% 1983 (+) 23.75% 1993 (+) 10.37% 2003 (+) 8.69% 1984 (+) 8.74% 1994 (-) 0.65% 2004 (+) 3.3% 1985 (+) 25.5% 1995 (+) 13.64% 2005 (+) 1.71% 1986 (+) 3.82% 1996 (+) 9.12% 2006 (+) 3.54% 1987 (+) 57.27% 1997 (+) 10.89% 2007 (+) 7.64% 1988 (+) 21.76% 1998 (+) 7.01% 2008 (+) 14.09%
“Simply put, the logical extension of using investment managers with specialized knowledge of traditional markets to obtain maximum return / risk tradeoffs is to add specialized managers who can obtain the unique returns in market conditions and types of markets not generally available to traditional asset managers; that is managed futures.”
Thomas Schneeweis Professor of Finance University of Massachusetts
Risk and Reward of Managed Products:
While Commodities, in general, have sometimes been regarded as high risk investments in the past, over the period 1990-2001, the average annualized standard deviations of individual CTAs and the Dow Jones 30 industrials were very similar at approximately 25%.
More importantly, modern portfolio investment theory has shown that assets should be compared on a risk-adjusted bases (i.e. mean return and standard deviation) and that the potential benefit of adding an asset to an existing portfolio may be measured by an assets excess break even return or the difference between its actual return and the return required to improve an asset’s or portfolio’s Sharpe ratio.
In conclusion, managed futures and foreign exchange not lonely offer investors the ability to diversity their investment portfolios but to lower overall portfolio risk and volatility simultaneously. By adding managed futures and / or foreign exchange as an investment class investors can create more robust investment portfolios to protect themselves during turbulent investment environments.