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Why Non-correlated Assets Are Important
in These Volatile Times
Patrick Carroll
Dave Shober
What are managed futures? The term managed futures describes an industry comprised of professional money managers known as commodity trading advisors. These trading advisors manage client assets on a discretionary basis using global futures markets as an investment medium. Trading advisors take positions based on expected profit potential. Managed futures are an asset class in their own right, separate from traditional investments such as stocks and bonds. They are part of the alternative asset class that includes hedge funds, private equities and credit derivatives.
Managed futures have been used by investment management professionals for over 30 years. When appropriate, managed futures can be an integral component of a well-diversified portfolio. As with any investment, there are risks associated with trading futures and options on futures. This type of investment may not be suitable for everyone. While past performance cannot guarantee future results, when choosing a managed futures fund, it is important to ensure the fund manager has a proven track record.
Adding managed futures to a traditional portfolio adds to the overall diversification of investments. This is substantiated by an extensive amount of academic research, beginning with the landmark study of the late Dr. John Lintner of Harvard University. In his study, he wrote that "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 stocks (or stocks and bonds) alone."However, while diversification into managed futures can help spread risk throughout your portfolio, it cannot ensure a profit or protect against a loss. The risk of loss in trading commodities can be substantial. You should therefore carefully consider whether such trading is suitable for you in light of your financial condition.
Managed futures generally have low or no correlation to traditional asset classes. This enables them to potentially enhance returns and lower overall volatility. They not only provide a diversified investment opportunity, they allow trading advisors to participate in more than 150 global markets: from grains and gold to currencies and stock indices. Correlations will change over time. Not all alternative investments provide low correlation to traditional markets.
The most important benefits of adding managed futures to a well-balanced portfolio include: potential to lower overall portfolio risk, opportunity to enhance overall portfolio returns, broad diversification opportunities, opportunity to profit in a variety of economic environments and the potential for limited losses due to a combination of flexibility and discipline.
For more information on managed futures and whether adding them to your investment portfolio is right for you, please contact Wealth Strategies Group at 301-990-4395 for a complimentary consultation.
Source: CME Group Managed Futures: Portfolio Diversification Opportunities and Futures Industry Association.
The opinions expressed herein are those of Patrick Carroll, an Investment Advisor Representative with Wealth Strategies Group (WSG). WSG provides financial planning assistance to Mid-Atlantic Federal Credit Union members. Securities and advisory services offered through National Planning Corporation (NPC), Member FINRA/SIPC, a Registered Investment Adviser, Wealth Strategies Group, Mid-Atlantic Federal Credit Union and NPC are separate and unrelated companies. Patrick Carroll may also be contacted at wsgmd.com or at wsg@natplan.com.
