) is a type ofalternative investmentin the US in which trading in thefutures marketsis managed by another person or entity, rather than the funds owner.Managed futures accounts include, but are not limited to,commodity pools. These funds are operated bycommodity trading advisors(CTAs) orcommodity pool operators(CPOs), who are generally regulated in the United States by theCommodity Futures Trading Commissionand theNational Futures Association. As of June2016, the assets under management held by managed futures accounts totaled $340 billion.

Managed futures accounts are operated on behalf of an individual by professional money managers such asCTAsorCPOs, trading infuturesor other derivative securities.3The funds can take bothlongandshortpositions infutures contractsandoptionson futures contracts in the global commodity, interest rate, equity, and currency markets.4

Managed futures accounts may be traded using any number of strategies, the most common of which istrend following. Trend following involves buying in markets that are trending higher and selling short in markets that are trending lower. Variations in trend following managers include duration of trend captured (short term, medium term, long term) as well as definition of trend (e.g. what is considered a new high or new low) and the money management/risk management techniques. Other strategies employed by managed futures managers include discretionary strategies, fundamental strategies, option writing, pattern recognition, and arbitrage strategies, among others.5However, trend following and variations of trend following are the predominant strategy.6

In many managed futures accounts the dollar amount traded is equal to the amount provided by the investor. However, managed futures also allows investors to leverage their investment with the use of notional funding, which is the difference between the amount provided by the investor (funding level) and the mutually agreed upon amount to be traded (trading level).7Notional funding allows an investor to put up only a portion of the minimum investment for a managed futures account, usually 25% to 75% of the minimum. For example, to meet a $200,000 minimum for a CTA that allows 50% notional funding, an investor would only need to provide $100,000 to the CTA. The investment would be traded as if it were $200,000, which would result in double the earnings or losses, as well as double the management fee relative to the actual amount invested. As a result, notional funding can add significant risk to managed futures accounts and investors who wish to use such funding are required to sign disclosures to state that they understand the risk involved.8

Managed futures have historically displayed very lowcorrelationsto traditional investments, such as stocks and bonds.9Followingmodern portfolio theory, this lack of correlation builds the robustness of the portfolio, reducing portfoliovolatilityand risk, without significant negative impacts on return. This lack of correlation stems from the fact that markets tend to trend the best during more volatile periods, and periods in which markets decline tend to be the most volatile.4From 1980 to 2010, the compound average annual return for managed futures was 14.52%, as measured by the CASAM CISDM CTA Equal Weighted Index, while the return for U.S. stocks was 7.04% (based on theS&P 500total return index).10However, managed futures also have high fees. According to data filed with the U.S. Securities and Exchange Commission and compiled by Bloomberg, 89% of the $11.51 billion of gains in 63 managed-futures funds went to fees, commissions and expenses during the decade from Jan. 1, 2003, to Dec. 31, 2012.11

In the United States, trading of futures contracts for agricultural commodities dates back to at least the 1850s.12In the 1920s, the federal government proposed the first regulation aimed at futures trading, and passed theGrain Futures Actin 1922. Following amendments in 1936, this law was replaced by theCommodity Exchange Act.1213TheCommodity Futures Trading Commission(CFTC) was established in 1974, under theCommodity Futures Trading Commission Act.13The regulation led to the recognition of a new group of money managers including CTAs. At that time, the funds they operated became known as managed futures. In the late 1970s, the relatively new managed futures funds began to gain acceptance.5Although the majority of trading was still in futures contracts for agricultural commodities,13exchanges started to introduce futures contracts on other assets, including currencies and bonds.5In the 1980s, the futures industry developed significantly3following the introduction of non-commodity related futures and by 2004 managed futures had become a $130 billion industry.5

Managed futures accounts are regulated by the U.S. federal government, through the CTAs and CPOs advising the funds. Most all of these entities are required to register with theCommodity Futures Trading Commissionand theNational Futures Associationand follow their regulations on disclosure and reporting.5

The 2010 enactment of theDodd-Frank Wall Street Reform and Consumer Protection Actled to increased regulation of the managed futures industry. On January 26, 2011, the CFTC made additions and amendments to the regulation of CPOs and CTAs, including two new forms of data collection. The CFTC also introduced regulation to require greater reporting of data and amend its registration requirements.14Under the new amended registration requirement, funds that useswapsor other commodity interests may be defined as commodity pools and as such their operators must register with the CFTC, where previously they did not.15On 17 April 2012, theUnited States Chamber of Commerceand theInvestment Company Institutefiled a lawsuit against the CFTC, aiming to overturn this change to rules that would require the operators of mutual funds investing in commodities to be registered.16

Managed Futures for Institutional Investors: Analysis and Portfolio Construction

. Bloomberg Press. pp.12.ISBN1576603741

High-Performance Managed Futures: The New Way to Diversify Your Portfolio

. Wiley, John & Sons, Incorporated.ISBN0470026634.

Managed Futures for Institutional Investors: Analysis and Portfolio Construction

. Bloomberg Press. pp.378.ISBN1576603741

High-Performance Managed Futures: The New Way to Diversify Your Portfolio

Fischer, Michael S. (September 2010).Under the investment radar.

How Investors Lose 89 Percent of Gains from Futures Funds.

Stassen, John H. (1982).The Commodity Exchange Act in Perspective a Short and Not-So-Reverent History of Futures Trading Legislation in the United States.

Commodity Pool Operators and Commodity Trading Advisors: Amendments to Compliance Obligations

The CFTCs final entity rules and their implications for hedge funds and other private funds

. Sutherland Asbill & Brennan LLP. 10 May 2012

Dolmetsch, Chris; Schmidt, Robert (17 April 2012).CFTC Sued By Fund Industry To Overturn Registration Rule.

Commodity Futures Trading Commission web site

Capital asset pricing modelalphabetasecurity characteristic line)

Articles containing potentially dated statements from June 2016

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This page was last edited on 13 December 2018, at 09:00

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