A managed futures account (MFA) or managed futures fund (MFF) is a type of
alternative investment in the US in which trading in the
futures markets
A futures exchange or futures market is a central financial exchange where people can trade standardized futures contracts defined by the exchange. Futures contracts are derivatives contracts to buy or sell specific quantities of a commodity or ...
is managed by another person or entity, rather than the fund's owner. Managed futures accounts include, but are not limited to,
commodity pool A commodity pool is an investment structure where many individual investors combine their moneys and trade in futures contracts as a single entity in order to gain leverage. They are analogous to mutual funds wherein a fund is similarly set up expre ...
s. These funds are operated by
commodity trading advisor
A commodity trading advisor (CTA) is US financial regulatory term for an individual or organization who is retained by a fund or individual client to provide advice and services related to trading in futures contracts, commodity options and/or ...
s (CTAs) or
commodity pool operators (CPOs), who are generally regulated in the United States by the
Commodity Futures Trading Commission
The Commodity Futures Trading Commission (CFTC) is an independent agency of the US government created in 1974 that regulates the U.S. derivatives markets, which includes futures, swaps, and certain kinds of options.
The Commodity Exchange Ac ...
and the
National Futures Association
The National Futures Association (NFA) is the self-regulatory organization (SRO) for the U.S. derivatives industry, including on-exchange traded futures, retail off-exchange foreign currency (forex) and OTC derivatives ( swaps). NFA is headquar ...
. , the assets under management held by managed futures accounts totaled $340 billion.
Characteristics
Managed futures accounts are operated on behalf of an individual by professional money managers such as
CTAs or
CPOs, trading in
futures
Futures may mean:
Finance
*Futures contract, a tradable financial derivatives contract
*Futures exchange, a financial market where futures contracts are traded
* ''Futures'' (magazine), an American finance magazine
Music
* ''Futures'' (album), a ...
or other derivative securities.
The funds can take both
long
Long may refer to:
Measurement
* Long, characteristic of something of great duration
* Long, characteristic of something of great length
* Longitude (abbreviation: long.), a geographic coordinate
* Longa (music), note value in early music mens ...
and
short
Short may refer to:
Places
* Short (crater), a lunar impact crater on the near side of the Moon
* Short, Mississippi, an unincorporated community
* Short, Oklahoma, a census-designated place
People
* Short (surname)
* List of people known as ...
positions in
futures contract
In finance, a futures contract (sometimes called a futures) is a standardized legal contract to buy or sell something at a predetermined price for delivery at a specified time in the future, between parties not yet known to each other. The asset ...
s and
options on futures contracts in the global commodity, interest rate, equity, and currency markets.
Trading strategies
Managed futures accounts may be traded using any number of strategies, the most common of which is
trend following
Trend following or trend trading is a trading strategy according to which one should buy an asset when its price trend goes up, and sell when its trend goes down, expecting price movements to continue.
There are a number of different techniques, ...
. 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.
However, trend following and variations of trend following are the predominant strategy.
Notional funding
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). Notional 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.
Performance
![Managed futures 1980 to 2008](https://upload.wikimedia.org/wikipedia/commons/0/01/Managed_futures_1980_to_2008.jpg)
Managed futures have historically displayed very low
correlation
In statistics, correlation or dependence is any statistical relationship, whether causal or not, between two random variables or bivariate data. Although in the broadest sense, "correlation" may indicate any type of association, in statistics ...
s to traditional investments, such as stocks and bonds. Following
modern portfolio theory
Modern portfolio theory (MPT), or mean-variance analysis, is a mathematical framework for assembling a portfolio of assets such that the expected return is maximized for a given level of risk. It is a formalization and extension of diversificati ...
, this lack of correlation builds the robustness of the portfolio, reducing portfolio
volatility and 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.
[ From 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 the ]S&P 500
The Standard and Poor's 500, or simply the S&P 500, is a stock market index tracking the stock performance of 500 large companies listed on stock exchanges in the United States. It is one of the most commonly followed equity indices. As of D ...
total return index). However, 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.
History
In the United States, trading of futures contracts for agricultural commodities dates back to at least the 1850s. In the 1920s, the federal government proposed the first regulation aimed at futures trading, and passed the Grain Futures Act
The Grain Futures Act (ch. 369, , ) is a United States federal law enacted September 21, 1922 involving the regulation of trading in certain commodity futures, and causing the establishment of the Grain Futures Administration, a predecessor orga ...
in 1922. Following amendments in 1936, this law was replaced by the Commodity Exchange Act. The Commodity Futures Trading Commission
The Commodity Futures Trading Commission (CFTC) is an independent agency of the US government created in 1974 that regulates the U.S. derivatives markets, which includes futures, swaps, and certain kinds of options.
The Commodity Exchange Ac ...
(CFTC) was established in 1974, under the Commodity Futures Trading Commission Act. The 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.[ Although the majority of trading was still in futures contracts for agricultural commodities,] exchanges started to introduce futures contracts on other assets, including currencies and bonds.[ In the 1980s, the futures industry developed significantly][ following the introduction of non-commodity related futures and by 2004 managed futures had become a $130 billion industry.][
]
Regulation
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 the Commodity Futures Trading Commission
The Commodity Futures Trading Commission (CFTC) is an independent agency of the US government created in 1974 that regulates the U.S. derivatives markets, which includes futures, swaps, and certain kinds of options.
The Commodity Exchange Ac ...
and the National Futures Association
The National Futures Association (NFA) is the self-regulatory organization (SRO) for the U.S. derivatives industry, including on-exchange traded futures, retail off-exchange foreign currency (forex) and OTC derivatives ( swaps). NFA is headquar ...
and follow their regulations on disclosure and reporting.[
The 2010 enactment of the Dodd-Frank Wall Street Reform and Consumer Protection Act led 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. Under the new amended registration requirement, funds that use swaps or other commodity interests may be defined as commodity pools and as such their operators must register with the CFTC, where previously they did not. On 17 April 2012, the ]United States Chamber of Commerce
The United States Chamber of Commerce (USCC) is the largest lobbying group in the United States, representing over three million businesses and organizations. The group was founded in April 1912 out of local chambers of commerce at the urging ...
and the Investment Company Institute
The Investment Company Institute (ICI) is a global association of regulated funds, including mutual funds, exchange-traded funds, closed-end funds and unit investment trusts in the United States, and similar funds offered to investors in jurisd ...
filed 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.
References
External links
Commodity Futures Trading Commission web site
National Futures Association web site
{{hedge funds
Commodity markets
Investment funds