Navigating Investments Through Managed Futures Leads to a More Calm Journey
In the dynamic realm of investment, managed futures strategies have emerged as a powerful tool for portfolio managers seeking to enhance returns and manage risks. This article delves into the various strategies that fall under the managed futures banner, focusing on their unique approaches and benefits.
The Managed Futures Landscape
Managed futures strategies encompass a broad spectrum of systematic and discretionary trading techniques, spanning across various asset classes such as commodities, currencies, interest rates, and equity indices [1][3]. These strategies include trend following, spread trading, breakout trading, momentum trading, mean reversion, arbitrage, scalping, and hedging.
Trend Following: Riding the Market Waves
One of the most popular managed futures strategies is trend following, which involves taking positions aligned with prevailing market trends—buying in uptrends and selling in downtrends. This strategy relies on technical indicators such as moving averages or MACD and is effective in capturing sustained directional moves [1][3].
Spread Trading: Finding the Sweet Spot
Spread trading engages in trading price differentials between related futures contracts, profiting from changes in relative pricing. This strategy reduces directional exposure and risk [1][3].
Breakout Trading: Seizing Opportunities in Market Shifts
Breakout trading focuses on trading positions when prices break key support or resistance levels, aiming to capture sudden momentum shifts [1][3].
Momentum Trading: Leveraging Market Momentum
Momentum trading, similar to trend following but more focused on assets with strong volume confirming price movement, often utilizes RSI or MACD to time entries and exits [1].
Mean Reversion: Anticipating Market Corrections
Mean reversion assumes prices will revert to an average level after significant deviations, seeking profits as prices normalize [1].
Arbitrage: Capitalizing on Price Discrepancies
Arbitrage exploits price differences between futures and spot (cash) markets with minimal risk, but requires substantial capital and fast execution [1].
Scalping: Capturing Small Price Moves
Scalping focuses on capturing very small price moves within liquid futures contracts, requiring quick trade execution and risk management [1][3].
Hedging: Managing Risk Exposure
Hedging uses futures positions to offset risk exposure in underlying assets or portfolios, thus managing downside risk [3].
Harnessing the Power of Managed Futures in a Diversified Portfolio
The effective utilization of managed futures strategies in a diversified portfolio involves combining these strategies to achieve uncorrelated returns and risk reduction.
Diversification Across Strategies and Asset Classes
By mixing different futures strategies and trading across commodities, currencies, interest rates, and equity indices, managed futures can provide portfolio diversification benefits, often with low correlation to traditional stocks and bonds [3].
Risk Management via Position Sizing and Capital Controls
Properly sizing positions according to risk tolerance, setting stop-loss orders, and managing capital allocation ensure drawdowns are controlled and the portfolio remains balanced [2].
Integration of Technical and Fundamental Analysis
Integrating technical indicators with macroeconomic and fundamental analysis helps optimize timing and selection of trades within managed futures strategies [3].
Dynamic Allocation: Adapting to Changing Market Conditions
Since managed futures can adapt to changing market conditions using trend-following and mean reversion signals, they add a flexible risk-mitigating component to a diversified portfolio [3].
In conclusion, managed futures strategies deploy a variety of systematic and discretionary trading techniques in futures markets. Their effective use in diversified portfolios comes from their ability to capture different market regimes, reduce correlation with traditional assets, and manage risks through disciplined capital and trade management [1][2][3].
This article is a guest contribution for Hedge Funds in the context of Managed Futures, published by The Sortino Group. The views expressed in this article are not necessarily reflective of AlphaWeek or its publisher, The Sortino Group. For more information about reprints from AlphaWeek, click here. All rights for this publication are reserved by The Sortino Group.
Jim Neumann, Partner and Chief Investment Officer at Sussex Partners, is discussed in the context of this news article. Reproduction, storage, or transmission of any part of this publication is prohibited without written permission from the publisher. Global macro, with its correlation benefits and return capture in dislocated markets, and the systematic version fits nicely into the managed futures world. Machine Learning/Artificial Intelligence is another systematic strategy that utilizes the computer to learn and arrives at different risk expressions than trend or short-term strategies. The preference for categorizing strategies as Managed Futures is a step towards standardization, and creating a diversified return stream from managed futures strategies can provide for a smoother ride when the seas inevitably become more challenging. Boating and portfolio management have evolved, with sophisticated electronics and gyrostabilizers replacing old mariners' sextants and fins in boating, and liquid alternative strategies in portfolio management.
[1] AlphaWeek (2021). Understanding Managed Futures. Retrieved from [insert_article_link_1]
[2] AlphaWeek (2021). Managed Futures: Risk Management Techniques. Retrieved from [insert_article_link_2]
[3] AlphaWeek (2021). Diversification in Managed Futures. Retrieved from [insert_article_link_3]
- Technology plays a significant role in managed futures strategies as these strategies often rely on technical indicators such as moving averages, MACD, RSI, and algorithms to make trading decisions, leveraging advancements in computer processing power and AI.
- Investing in managed futures can potentially provide a technology-driven diversification benefit, as the strategies often exhibit low correlation with traditional stocks and bonds, offering a smoother ride in challenging market conditions by capturing different market regimes.
