Diversification with Managed Futures Accounts

Many studies have been conducted to help define the benefits of diversification of a managed futures account in a portfolio of stocks and bonds.

Harvard Business School Professor John E. Lintner found that including managed futures in a portfolio "reduces volatility while enhancing return," and that such portfolios "have substantially less risk at every possible level of return than portfolios of stocks, or stocks and bonds." For the period of January 1, 1980, to December 31, 1998, data show that managed futures investments (as measured by the Barclay CTA Index) had a compound annual return of about 15.8%. That compares very favorably with the 17.7% return that common stocks had during the same period, one of the strongest stock markets in U.S. history. Further, it exceeded the 11.8% return on bonds. Moreover, during a similar period (Jan. 1, 1980, to December 31, 1997), analysis showed that a portfolio that comprised some managed futures had similar profitability with far less risk.

From the Chicago Mercantile Exchange Question and Answer Brochure #m584/10m/1299, 1999

A study published by the Chicago Board of Trade in their brochure "Managed Futures, Portfolio Diversification Opportunities" states that a portfolio with the greatest risk and least returns was comprised of 50% stocks, 50% bonds and 0% managed futures. The portfolio with the greatest returns and least risk was comprised of 41% stocks, 41% bonds, and 18% managed futures. Link to the brochure.

A recent paper entitled "Facts and Fantasies about Commodity Futures" by Gary Gorton of the University of Pennsylvania's Wharton School and K. Geert Rouwenhorst of the Yale School of Management at Yale University concluded that over the past 45 years, commodity futures have had nearly the same return as stocks with less risk. It was also noted that commodity futures considerably outperformed bonds during this time and have been a better hedge against inflation than either stocks or bonds.

It has been reported that Harvard University's 19 billion dollar plus pension fund is now allocating up to 13% of its investments to the Futures Markets. This allocation is only 2% points less than Harvard's pension allocation to U.S. stocks and greater than its allocation to U.S. Bonds.

From Wall Street Journal article 9/9/04 "Commodities Enter Investment Mainstream" by Michael R. Sesit

Clearly, if large Pension Funds and Institutional Accounts believe that the Futures Markets can help balance their portfolios then it may be worthwhile for accredited individual investors to do the same

Over the past decade, Managed Futures Accounts have faired much better than U.S. Stocks or U.S. Bonds. That's a very bold statement. However, as the graph below shows, a $10,000 investment in the Dow Jones-AIG Commodity Index begun in 1998 would have returned more than 50% through the fall of 2003.

As the above diagram shows, the potential for higher performance returns using Managed Futures compares well to that of other investments over the past 5 years.