Managed Futures strategies can be a source of uncorrelated alpha because they are directionally unbiased, often cover a variety of time frames in their position holding periods, and have historically sought returns independently of the prevailing economic or volatility regime.
Overall, these strategies have performed well during many periods that were difficult for equity markets and other hedge fund strategies. This is a result of the internal diversification, unbiased directionality, and the risk management styles of CTAs. The market conditions that have traditionally been difficult for CTAs employing trend following strategies have been those in which there is no follow through on trends, such that prices are mean-reverting. As a result, many CTAs incorporated additional strategies in an effort to capture these types of market characteristics as a complement to their trend following.
» Managed Futures strategies tend to reduce portfolio variance. The addition of uncorrelated variance may also have a beneficial effect on other performance and risk metrics.
» The exchange-listed underlying instruments used by CTAs facilitate risk management and mitigate many of the risks associated with model risk. The margining process also allows for flexible and effective cash efficiency.
On the risk side, Managed Futures present risks for investors just like any other hedge fund style. Investors can potentially experience volatility and substantial drawdowns, especially if the trading manager has set a higher return objective and takes more risk to try to obtain it. Investors should always conduct thorough due diligence to properly understand the potential risks and weaknesses of trading programs before investing. This is especially important because the trading methodologies employed by CTAs, the level of risk and return that is targeted, and the quality of the operational infrastructure of trading managers may vary widely across the space.
(Source: CME Group)
Contact us for information on alternative investments and managed futures.
Bluenose Capital Management – Washington DC Alternative Investments / Managed Futures – (703) 842-3323
Past performance is not necessarily indicative of future results. Futures and options on futures trading is speculative, involves substantial risk and is not suitable for all investors. Prospective investors should carefully read the disclosure document of BLUENOSE CAPITAL MANAGEMENT, LLC before making any investment decision. COMMODITY TRADING INVOLVES SUBSTANTIAL RISK OF LOSS.