Benefits Of Managed Accounts
Managed Futures, by their very nature, are a diversified investment opportunity. Trading advisors have the ability to trade in over 150 different markets worldwide. Many funds further diversify by using several trading advisors with different trading approaches.
The benefits of managed futures within a well-balanced portfolio include:
- Opportunity for reduced portfolio volatility risk
- Potential for enhanced portfolio returns
- Ability to profit in any economic environment
- Opportunity to participate easily in global markets
1. Reduced Portfolio Volatility Risk
The primary benefit of adding a managed futures component to a diversified investment portfolio is that it may decrease portfolio volatility risk. This risk-reduction contribution to the portfolio is possible because of the low to slightly negative correlation of managed futures with equities and bonds. One of the key tenets of Modern Portfolio Theory, as developed by the Nobel Prize economist Dr. Harry M. Markowitz, is that more efficient investment portfolios can be created by diversifying among asset categories with low to negative correlations.
2. Potential for Enhanced Portfolio Returns
While managed futures can decrease portfolio risk, they can also simultaneously enhance overall portfolio performance. Substantiated by an extensive bank of academic research, beginning with the landmark study of Dr. John Linter of Harvard University, in which 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."
John Litner, "The Potential Role of Managed Commodity Financial Futures Accounts [and or funds] in Portfolios of Stocks and Bonds" Annual Conference of Financial Analysts Federation, May 1983.
3. Ability to Profit in any Economic Environment
Managed futures trading advisors can take advantage of price trends. They can buy futures positions in anticipation of a rising market or sell futures positions if they anticipate a falling market. For example, during periods of hyperinflation, hard commodities such as gold, silver, oil, grains and livestock tend to do well, as do the major world currencies. During deflationary times, futures provide an opportunity to profit by selling into a declining market with the expectation of buying, or closing out the position, at a lower price. Trading advisors can even use strategies employing options on futures contracts that allow for profit potential in flat or neutral markets.
4. Ease of Global Diversification
The establishment of global futures exchanges and the accompanying increase in actively traded contract offerings have allowed trading advisors to diversify their portfolios by geography as well as by product. For example, managed futures accounts can participate in at least 150 different markets worldwide, including stock indexes, financial instruments, agricultural and tropical profits, precious and non-ferrous metals, currencies and energy products. Trading advisors thus have ample opportunity for profit potential and risk reduction among a broad array of non-correlated markets.
5. Compensation to CTAs based on Profits
CTAs are compensated primarily through an incentive program where the trading advisor, the CTA, is paid on a quarterly basis based on profitability. IECo's list of recommended CTAs standard rate of compensation usually falls between 20-30% of profits after all costs per quarter. Some CTAs also include a small management fee that usually falls between 1 to 2% of assets under management per year, usually broken down to .025 to .050 % per quarter.
We believe the incentive compensation to a CTA is one of the most attractive features of having a Managed Futures Account. Think about it, if your advisor doesn't perform for you, then there is little or no compensation for them. Professional traders sharing in your profits is common, knowing that they do so only when they are making you a profit is reassuring to many investing in Managed Futures Accounts.
The CTAs IECO recommends do not share in trading commissions.
6. Full Transparency of a CTA's Trading
Another benefit of utilizing a CTA to manage your account is the full transparency of all transactions. CTAs are some of the most scrutinized and audited investment professionals in the investment field. A detailed Disclosure Document is required to be updated at least every 9-months. In addition, CTAs track records are typically updated every month. All transaction costs and fees are disclosed by the CTA and can be viewed by IECo customers online. Statements of transactions are e-mailed to all customers with an e-mail address. Regular post mail can be used, but at a small charge.
Sections 1-4 were copied from Portfolio Diversification Opportunities printed by the Chicago Board of Trade. @ 1996, 1999, 2002, 2003