Here, Diane Harrison argues that 2014 is going to have opportunities for a range of markets to show some life, and and that it has become an up-and-down world that investors need to embrace.
With uncertainty dominating world news and subsequent market reactions, investors are searching for ways to help them mitigate portfolio investment risk, says Diane Harrison. She believes that 2014 is going to present opportunities in a range of markets, and that it's become an up-and-down world that investors should embrace. This piece looks at how managed futures fit the bill for both retail and institutional players.
Opinions are the author's, but Family Wealth Report is grateful for the right to publish them and welcomes reader responses. Harrison is principal and owner of Panegyric Marketing, a marketing communications firm founded in 2002 and specializing in the alternative assets sector.
The use of alternatives has long been accepted by sophisticated investors as a proven way to help reduce overall portfolio risk over market cycles. Managed futures have always been central to this option, particularly when sharp volatility spikes drag traditional market classes down together.
Yet the asset class remains somewhat of a mystery to many investors. They question how managed futures can provide a port in the storm during choppy markets. They have been led to be skeptics based on a general tendency of the media to focus its coverage on trend followers’ downside performance during the fiscal intervention years of recent past, and to exhibit a lack of emphasis on the benefits managed futures offer to investors through diversification and non-correlation.
To achieve the benefits of managed futures, investors need to minimize the risks and do everything they can to improve their chances for success during difficult market conditions. Managed futures have low correlation to stocks and bonds, mainly due to equal facility in up or down market cycles. Here are some of the basic benefits that this strategy provides:
- Able to achieve absolute returns: Commodity trading advisors, the professionals who trade managed futures, are comfortable trading both long and short markets, increasing the potential to profit from market moves in either direction and creating potential for absolute returns. CTAs can deliver absolute returns by buying futures positions in anticipation of a rising market or selling futures positions if they anticipate a falling market. They can also employ options strategies with futures contracts that allow for profit potential in flat or neutral markets.
- Able to profit from rising or falling markets: Commodities markets often respond more strongly to supply and demand factors as primary drivers rather than macro factors such as a strong economy, credit conditions, or corporate profits. CTAs are also trading in highly liquid, well-regulated, exchange-traded instruments and foreign exchange markets, which allows for the portfolio to be “marked-to-market” daily. And unlike long-only commodity indices and commodity ETFs, which rely on the price of commodities rising, managed futures programs actively trade both sides of commodity price movements, allowing them to potentially perform whether commodity markets go up or down.
- Able to offer protective stance during prolonged or severe market declines: History shows that managed futures are often one of the best performing assets during bear markets and financial crises.