CAIA Level II: Advanced Core Topics in Alternative Investments, 2nd Edition

CHAPTER 30

Managed Futures: Strategies and Sources of Return

The sources of return to managed futures are essentially different from those related to traditional stocks, bonds, or even hedge funds. For instance, futures, swaps, and forward contracts can provide direct exposure to underlying financial and commodity markets but often with greater liquidity and less market impact. Futures and options allow traders to take short positions without the need to borrow the securities from other investors. This allows traders to actively allocate assets between long and short positions within the futures/options market-trading complex. In addition, options traders may also directly trade market/security characteristics, such as price volatility, that underlie the contract. The unique return opportunities of managed futures may also stem from the global nature of futures contracts available for trading and from the broader range of trading strategies.

It is important to note that many managed futures strategies trade primarily in futures markets, which are zero-sum games. This means that each futures contract involves two counterparties, in which the gains by one party result from equal losses by the other party. Ignoring transaction costs and the return to margin accounts, the total return from the futures contract to the parties is therefore zero. If CTAs were only trading against other CTAs, then one may conclude the following:

• The total rate of return to the entire managed futures ...