What are “Managed Futures”?

Managed futures refer to professionally managed assets in commodity and financial exchange traded derivatives, including futures, options on futures, and to a lesser extent, forward contracts. Management of client assets is directed by Commodity Trading Advisors (CTAs) and Commodity Pool Operators (CPOs) under the regulatory auspices of the Commodity Futures Trading Commission (CFTC) and the National Futures Association (NFA), a self-regulatory body. Accounts are held with clearing firms called Futures Commission Merchants (FCMs), and Introducing Brokers (IBs) serve as guaranteed or independent correspondents.

How are managed futures different from hedge funds?

Managed futures and hedge funds share a similar history and legacy the first commodity fund was started in 1948, and the first hedge was fund established in 1949. Technically, hedge funds are privately organized pooled investment vehicles which operate under various exemptions related to securities regulations. Interestingly, CPOs are a hybrid between managed futures and hedge funds, and it is noted that while some hedge funds actively trade futures they can avoid CFTC registration. Admittedly, hedge funds are better known and have more assets under management. Yet despite the size and status of hedge funds relative to managed futures, the latter’s impact upon the alternative investment space is writ large in two significant and related ways: first, managed futures, unlike its brethren hedge funds, operate in a highly regulated environment; second, this same regulated environment which imposes disclosure and reporting requirements, compelled the data on managed futures to be made public, which in turn helped academics advance early studies on alternative investments, prior to developing any substantial research on hedge funds. In effect, managed futures were key to institutionalizing alternative investments.

What is the difference between a CTA and a CPO?

Both commodity trading advisors (CTAs) and commodity pool operators (CPOs) provide advice to the public with respect to investment in commodity and financial futures, and options on futures. CTAs typically provide advisory services in the form of a separately managed account, which is just like any futures brokerage account except that the account is managed by a third party — the CTA. On the other hand, CPOs commingle the assets of investors into a pooled vehicle, usually a limited partnership, and then subsequently allocate client assets to be traded by CTAs or by the CPO itself. The managed account vehicle utilized by CTAs is a more transparent and liquid investment by its very nature/structure. Whereas a commodity pool is less transparent and usually provides only monthly or quarterly reporting; further, it is less liquid in that redemptions are facilitated on a monthly or quarterly basis. There are advantages to the commodity pool structure though, including the ability to invest in CTAs with high minimums, as well as professional selection/oversight of CTAs.

What is the difference between managed futures and commodity ETFs?

This question is worthy of a book. Briefly, commodity exchange traded funds (ETFs) are a new type of investment vehicle which allows investors to invest in commodities as if the instrument was a stock. Just a few years ago, the only way to invest in commodities was either through the futures/derivatives market or through a pooled investment vehicle. Commodity ETFs are usually long-only, and marketed on the basis of three types of returns: (i) “collateral return,” which results from investing monies into fixed income instruments which collateralize the derivatives that provide commodity exposure for the ETF; (ii) “spot return” which is the change of price in the underlying commodity exposure; and (iii) “roll return” which supposedly results from the “rolling forward of futures contracts.” The “roll return” is a hotly debated concept within academic circles, but Wall Street markets the idea nonetheless. There is a fourth source of return, less often stated, which is the “strategy return” that comes from rebalancing the portfolio. Managed futures differs from commodity ETFs in that “strategy return” is the main focus, and most CTAs will go long and short a market taking advantage of “spot returns” either way. With respect to “roll returns”, certain CTAs employ calendar spreads which effectively arbitrage for this source of return. At the same time, managed futures accounts can be invested in fixed income allowing an investor to obtain “collateral return.” However, it should be noted that managed futures involve leverage whereas commodity ETFs usually invest on a fully collateralized basis.

What fees are charged in managed futures?

In addition to commission, regulatory and exchange fees, typically there are two fees associated with investing in Managed Futures: management fees and incentive fees. A management fee is charged by the CTA to manage the assets they trade. An incentive fee is the percentage a CTA will charge on any new trading profits on the account. The incentive fee is paid on performance: if the CTA does not make a profit, you do not pay an incentive fee. Generally, management fees are 2% of AUM/year, and incentive fees are 20% of new trading profits.

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