A managed futures account (MFA) or managed futures fund is a type of alternative investment. Managed futures accounts include, but are not limited to, commodity pools and commodity funds. Unlike mutual funds, managed futures accounts can take both long and short positions in futures contracts and options on futures contracts in the global commodity, interest rate, equity, and currency markets.
Managed futures accounts are operated by licensed commodity trading advisors (CTAs), who are regulated in the United States by the Commodity Futures Trading Commission and the National Futures Association. Some are compensated on a performance fee basis, usually 15% to 30% of profits. Other CTAs are compensated by charging a per trade cost whenever the account or fund trades. Most CTAs also charge a management fee per year, usually between 1% to 2% of the account size.[1]
MFAs may be traded using any number of strategies, the most common of which is trend following. Trend following involves buying markets that are making new highs and shorting markets that are making new lows. Variations in trend following managers include duration of trend captured (short term, medium term, long term) as well as definition of trend (i.e. what is considered a new high or new low) and the money management/risk management techniques. There are other strategies managed futures managers use, including discretionary strategies, fundamental strategies, option writing, pattern recognition, arbitrage strategies, etc. However, trend following and variations of trend following are the predominant strategy.
For the years 1980 to 2010, managed futures, as measured by the CASAM CISDM CTA Equal Weighted Index, had a compound average annual return of 14.52%, while for U.S. stocks (based on the S&P 500 total return index) the return was 7.04%.[2]
Managed futures have historically displayed very low correlations to traditional investments, such as stocks and bonds. Following modern portfolio theory, this lack of correlation builds the robustness of the portfolio, reducing portfolio volatility and risk, without significant negative impacts on return. This lack of correlation stems from the fact that markets tend to "trend" the best during more volatile periods, and periods in which markets decline tend to be the most volatile. In fact the CISDM CTA Equal Weighted Index has been up 26 out of the 32 times the S&P 500 has been down 5% or greater since 1980.[2]