The benefits of managed futures within a well-balanced portfolio include:
- Potential to lower overall portfolio risk
- Opportunity to enhance overall portfolio returns
- Broad diversification opportunities
- Opportunity to profit in a variety of economic environments
- Limited losses due to a combination of flexibility and discipline
By their very nature, managed futures provide a diversified investment opportunity. Trading advisors can participate in more than 150 global markets; from grains and gold to currencies and stock indices. Many funds further diversify by using several trading advisors with different trading approaches. In this example, the overall risk is reduced by almost 82 percent from –41.0 percent to –7.5 percent and the return also increases almost 20 percent from +7.4 percent to +8.9 percent. This is mainly due to the lack of correlation and, in some cases, negative correlation between some of the portfolio components in the diversified portfolio. There is even negative correlation between stocks and managed futures as the two markets move independently from each other.
Looking back over the past few decades, managed futures have consistently outperformed other asset classes such as stocks and bonds. Consider an initial investment of $10,000 invested in 1980. If placed in a U.S. stock fund mirroring the S&P 500, the investment would have been worth approximately $288,000 as of early 2008. Allocating the same amount to a basket of international equities reflecting the Morgan Stanley Capital International Index of world stocks, the initial investment would have grown to nearly $120,000. But the same investment in managed futures, based on the Center for International Securities and Derivatives Markets weighting, would now be worth more than $513,000.