What is Managed Futures Account: Definition, Advantages & Example

What is Managed Futures Account: Definition, Advantages & Example

Managed futures account or managed futures fund is an alternative investment avenue available for retail investors in the United States of America (US). Wherein instead of the fund owner, another entity viz. a professional or a team of professionals manage the fund and trade in the derivative segment of the financial markets with aim of earning profits.

The professionals or team of professionals that manage and operate the managed futures fund are known as Commodity Trading Advisors (CTAs) or Commodity Pool Operators (CPOs).

Contrary to the name, they are not restricted to commodity derivatives, but are free to trade and invest on all exchange traded derivatives based on stocks, indices, interest rates, swaps etc. although they primarily trade in futures.

Managed Futures Accounts are traded on exchanges such as the CME Group, Eurex  and Atlanta-based Intercontinental Exchange (ICE) and are regulated by the Commodity Futures Trading Commission (CFTC) and the National Futures Association (NFA). 

Strategies adopted by CTAs

  • Systematic CTAs

A systematic CTA makes trades based on models or computer programs.  These signals are based on technical analysis and fundamental analysis based on the factors incorporated for the selection criteria of the computer model.Thus striving to eliminate all human intervention and guess work in trading. However here the model must be updated with latest technological advancements to receive the best result. This promotes pragmatic decision making.

  • Discretionary CTAs.

Discretionary CTAs are on the opposite end of the spectrum as compared to systematic CTAs. The trading decisions are based on fundamentals or technical analysis but the decision is taken at the discretion of the CTA and not a computer model. Thus also arises the possibility of emotions getting in the way of decision making leading to suboptimal results. 

  • A combination of discretion and systematic CTA is also possible

CTAs can have multiple models with a systematic component for automation and productivity that gathers data, but the professionals make the final decisions at their own discretion whether to actually execute the trade or not.  

Benefits of investing in Managed Futures 

There are several potential benefits of investing in managed futures, including:

  1. Diversification: Managed futures can provide diversification benefits to an investment portfolio as they often have low correlation to traditional assets such as stocks and bonds.
  2. Low Correlation with Traditional Assets: Managed futures have low correlation with traditional assets, this can help to reduce portfolio volatility and smooth out returns over time.
  3. Potential for Positive Returns in Down Markets: Managed futures have the potential to generate positive returns during market downturns, which can help to offset losses in other parts of an investor's portfolio.
  4. Professional Management: Managed futures accounts are typically managed by experienced professionals who use a variety of trading strategies to generate returns.5
  5. Transparency: Managed futures accounts provide investors with transparency as they can see the underlying positions held in their account and the performance of the account.
  6. Liquidity: Managed futures markets are highly liquid and allow investors to enter and exit positions quickly.
  7. Risk management: Managed futures account managers use risk management techniques such as stop-loss orders to limit potential losses.

Drawbacks of investing in Managed Futures

Investing in managed futures also comes with potential drawbacks, such as:

  1. High Fees: Managed futures accounts often have high management fees and performance-based fees, which can eat into returns.
  2. Volatility: Managed futures markets are known for their high volatility, which can lead to significant losses if not managed properly.
  3. Lack of Regulation: Managed futures accounts are not as heavily regulated as other investments such as stocks and bonds.
  4. Lack of Transparency: Some managed futures accounts are not transparent, and investors may not have access to information about the underlying positions held in their account.
  5. Limited Historical Performance Data: Managed futures have a relatively short history, and historical performance data may not be available for some managers or strategies.
  6. Lack of Control: Investors in managed futures accounts have limited control over the trading decisions made by the account manager.
  7. Limited accessibility: Managed futures accounts may have high minimum investment requirements, and may not be accessible to small investors.

It's important for an investor to thoroughly research and understand the potential drawbacks of managed futures before investing, and consider if it aligns with their risk tolerance, investment goals and overall portfolio diversification.