Tactical Portfolios: Strategies and Tactics for Investing in Hedge Funds and Liquid Alternatives

CHAPTER 6

Managed Futures

Mark Melin

Opalesque Futures Intelligence

Here we will break down managed futures strategies and learn more about how each of these strategies can bring value to a portfolio. At the end we present our criteria for evaluating CTAs, or Commodity Trading Advisors, the name for managers that use managed futures strategies.

Broadly speaking, managed futures is a term for hedge funds that rely on the use of futures contracts for the core of the trading strategy. Futures are contracts to sell something—metals, crops, or currencies usually—at a future date. Investors in futures do not carry with them any immediate ownership in the asset that is part of the contract. Instead, both sides make good faith deposits on the contract. Both sides must also keep margin accounts in case the price for the contract goes up, requiring a larger deposit. This is known as a margin call.

Managed Futures funds are typically run by a CTA. CTAs registered with organizations like the National Futures Association, which provide audited track records of performance and basic background information. (We will cover how to evaluate a CTA later in the chapter.)

Managed futures contracts can go up or down in price and can be bought or sold at any time before the delivery date, which is the bread and butter of most managed futures strategies. Here is one example:

Two parties agree on a $40,000 pork belly contract on Monday for a contract that comes due in October. The deposit value on this ...