What is a Managed Futures Fund and How Does It Work

A managed futures fund is a type of investment vehicle that allows individuals to invest in the futures market with a professional manager.

These funds are designed to generate returns through the use of leverage, which means they can amplify gains and losses.

Managed futures funds typically employ a strategy of diversification, spreading investments across various asset classes and markets to minimize risk.

By doing so, they aim to provide consistent returns with lower volatility than other investment options.

A key feature of managed futures funds is their ability to profit from both rising and falling markets, making them a potentially attractive option for investors seeking to hedge against market downturns.

Managed futures have become a popular alternative to traditional hedge funds, especially for institutional investors looking to diversify their portfolios.

Funds and other institutional investors often use hedge fund investments as a way of diversifying their traditional investment portfolios of large market cap stocks and highly rated bonds.

Hedge funds were an ideal diversification play because they are active in the futures market.

Managed futures have developed to offer a cleaner diversification play for these institutional investors.

Managed futures funds are a unique investment option that's actively managed by professionals. They trade in futures or other derivative securities, giving you the ability to take both long and short positions in various global markets.

These funds can be operated on behalf of an individual, taking away the need for direct involvement in trading decisions. Professional money managers, such as CTAs or CPOs, handle the day-to-day management of the fund.

There are two common approaches used in trading managed futures: market-neutral and trend-following strategies. The market-neutral strategy looks to profit from spreads and arbitrage created by mispricing, while the trend-following strategy aims to profit by going long or short according to fundamentals or technical market signals.

Here are the two common approaches for trading managed futures:

Managed futures accounts are operated on behalf of an individual by professional money managers such as CTAs or CPOs. These managers trade in futures or other derivative securities.

The funds can take both long and short positions in futures contracts and options on futures contracts. This allows for a wide range of investment opportunities.

Managed futures accounts can be used in the global commodity, interest rate, equity, and currency markets. This provides investors with a diverse range of options for their investments.

Here are some common characteristics of managed futures accounts:

Adding complexity to trend following models is a common approach to differentiate them from simple models. This can include statistical innovations and expansion into less liquid markets.

The idea is that complexity should result in higher risk-adjusted returns and justify higher fees. However, the replication of single manager mutual funds shows that complexity can actually detract from returns over time.

In fact, replication demonstrates that complexity can materially increase execution costs, exacerbate single manager dispersion, and magnify downside risk. This suggests that complexity may not always be beneficial.

Many practitioners seek to add complexity to their models, but the evidence suggests that simplicity can be just as effective.

Managed futures accounts can be traded using various strategies, with trend following being the most common. Trend following involves buying in markets that are trending higher and selling short in markets that are trending lower.

Managed futures managers employ different variations of trend following, including duration of trend captured and definition of trend. A theoretical optimal portfolio capturing trends has been derived, and these trends have been widely documented.

Other strategies used by managed futures managers include discretionary strategies, fundamental strategies, option writing, pattern recognition, and arbitrage strategies. However, trend following and variations of trend following are the predominant strategy.

Here are some common strategies used in managed futures:

Managed futures accounts may be traded using any number of strategies, the most common of which is trend following. Trend following involves buying in markets that are trending higher and selling short in markets that are trending lower.

Trend following managers vary their approach in terms of duration of trend captured, definition of trend, and money management/risk management techniques. A theoretical optimal portfolio capturing trends has been derived, and these trends have been widely documented.

Trend following is the predominant strategy employed by managed futures managers, with variations including discretionary strategies, fundamental strategies, option writing, pattern recognition, and arbitrage strategies.

Managed futures accounts may also employ market-neutral strategies, which look to profit from spreads and arbitrage created by mispricing. Investors who employ this liquid alternative strategy frequently look to mitigate market risk by taking matching long and short positions in a particular industry.

Here are some common trading strategies used in managed futures:

Notional funding allows investors to leverage their investment by putting up only a portion of the minimum investment required for a managed futures account. This can range from 25% to 75% of the minimum investment.

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. Notional funding can add significant risk to managed futures accounts.

The investment would be traded as if it were $200,000, resulting in double the earnings or losses. This means that investors who use notional funding will also pay double the management fee relative to the actual amount invested.

Investors who wish to use notional funding are required to sign disclosures to state that they understand the risk involved.

Managed futures funds have a rich history dating back to the 1850s in the United States. The federal government proposed the first regulation aimed at futures trading in the 1920s, leading to the passage of the Grain Futures Act in 1922.

The regulation of managed futures accounts has evolved over time, with the Commodity Futures Trading Commission (CFTC) being established in 1974. This led to the recognition of a new group of money managers, including Commodity Trading Advisors (CTAs), who operate managed futures funds.

The CFTC and National Futures Association (NFA) regulate CTAs and CPOs, conducting audits and ensuring they meet quarterly reporting requirements. The heavy regulation of the industry has contributed to the growth of managed futures funds, which have become a $130 billion industry by 2004.

The Dodd-Frank Wall Street Reform and Consumer Protection Act of 2010 led to increased regulation of the managed futures industry. The CFTC introduced new regulations, including two new forms of data collection and greater reporting requirements for CPOs and CTAs.

The regulation of managed futures is a complex but crucial aspect of the industry. The Commodity Futures Trading Commission (CFTC) and the National Futures Association (NFA) play a significant role in regulating CTAs and CPOs, conducting audits and ensuring they meet quarterly reporting requirements.

In 2010, the Dodd-Frank Wall Street Reform and Consumer Protection Act led to increased regulation of the managed futures industry. This resulted in the CFTC making additions and amendments to the regulation of CPOs and CTAs in 2011.

One of the key changes was the introduction of two new forms of data collection, which aimed to provide greater transparency and accountability within the industry. The CFTC also introduced regulation to require greater reporting of data and amend its registration requirements.

Prior to 2011, funds that used swaps or other commodity interests were not required to register with the CFTC. However, under the new amended registration requirement, these funds are now defined as commodity pools and their operators must register with the CFTC.

The CFTC's efforts to regulate the industry have been met with resistance from some quarters. In 2012, the United States Chamber of Commerce and the Investment Company Institute filed a lawsuit against the CFTC, aiming to overturn the change to rules that would require the operators of mutual funds investing in commodities to be registered.

Here is a summary of the key regulatory changes:

The history of futures trading in the United States dates back to at least the 1850s, with trading of agricultural commodities being a major part of it.

The federal government first proposed regulation for futures trading in the 1920s, leading to the passage of the Grain Futures Act in 1922.

The Grain Futures Act was amended in 1936 and eventually replaced by the Commodity Exchange Act, which marked a significant shift in the regulation of futures trading.

The Commodity Futures Trading Commission (CFTC) was established in 1974, giving the industry a more formal regulatory framework.

The CFTC's establishment led to the recognition of a new group of money managers, known as CTAs, who operated managed futures funds.

Managed futures funds became widely accepted in the late 1970s, with the funds themselves becoming known as managed futures.

By the 1980s, the futures industry had grown significantly, with the introduction of non-commodity related futures contracts.

By 2004, managed futures had become a $130 billion industry, a testament to the growth and evolution of the futures market over the years.