Managed Futures Today Magazine

Managed futures have been around for more than a generation, but developments in recent years have given more choices to investors and advisors seeking exposure to this segment of the financial marketplace.

The reasons for doing so are now well-known: Various studies have shown managed futures are uncorrelated to the equity market over time and have the ability to smooth and enhance returns in a diversified investment portfolio.

In the past, some individual investors — even those falling into the “sophisticated” category — might have bypassed directly trading futures contracts. Today, there are hundreds of managed futures funds and funds of funds in the U.S. alone, managing nearly a quarter of a trillion dollars in investor assets. But in addition to these investments, new products, including exchange-traded commodity funds, commodity mutual funds — and most recently, managed futures mutual funds — have expanded the universe of options for investors seeking portfolio diversification.


Managed futures mutual funds vs. commodity funds
Most commodity related exchange-based products, such as exchange-traded funds (ETFs) and exchange-traded notes (ETNs), are long-only securities designed to track the performance of a commodity index or benchmark. For example, the PowerShares DB Commodity Index Tracking Fund (DBC), which is designed to track the Deutsche Bank Liquid Commodity Index, holds long positions in crude oil, heating oil, gasoline, natural gas, Brent crude oil, gold, silver, aluminum, zinc, copper, corn, wheat, soybeans, and sugar futures. Other exchange-traded products are designed to track specific commodities or commodity groups.

Various commodity mutual funds use a similar approach. Like equity mutual funds, commodity mutual funds pool capital from many investors; they simply invest in commodities rather than stocks or bonds. Some of the first commodity mutual funds were, in fact, launched by well-established equity fund firms, including Oppenheimer and PIMCO. Although some funds actually hold positions in physical commodities (e.g., gold bullion), the majority take positions in the futures market to track different commodity indices or groups.

While all these instruments offer exposure to commodities, the new managed futures mutual funds take things one step further by combining the investor-friendly mutual fund package with the added diversification and independence of managed futures returns. The typical managed futures mutual fund actively manages a portfolio of several Commodity Trading Advisor (CTA) programs, which can vary in terms of trading style, market focus, and time frame.

Earlier this year, Denver-based Equinox Fund Management, which also operates a traditional long-only $800 million public commodity pool, launched a managed futures mutual fund called the MutualHedge Frontiers Legend Fund (MHFAX), which has a minimum investment of $2500. While traditional commodity funds typically do not incorporate stock index and other financial futures in order to limit correlation to the equity market, because CTAs can go long and short, managed futures funds offer an additional layer of diversification. Equinox President and CEO Bob Enck stresses the added flexibility a managed futures fund has over a traditional long-only commodity tracking fund.

“Managed futures have the ability to go long or short in any of six different commodity categories,” Enck says.

The Frontiers Legend Fund incorporates equity index, interest rate, and currency futures in addition to metals, energy, and agricultural contracts, which Enck says are distributed among CTA with “dissimilar investment philosophies.”

Like any managed futures investment, Enck says the fund is designed to play a specific investment role.

“First an foremost, this needs to be built into a client’s investment plan and fit into an already diversified portfolio in the alternative investment category,” he says. “This is not for someone who needs income. This is a diversifier for a growth portfolio.”

Given that, though, Enck notes managed futures are one of the few non-correlated asset classes investors can add to a portfolio to smooth and, hopefully, enhance overall returns.

“The real benefit is the fact that managed futures are not correlated to other asset classes,” he says. “In fact, the correlation coefficient relative to equities is close to zero over an extended time frame.”

Enck cites the advantage of the active management structure vs. the static ETF/ETN model.

“First, because they’re long-only and tracking an index, you’re hoping at some level commodities will continue to rise,” Enck says of exchange-traded commodity fund products. “CTA programs, by contrast, have the ability to profit when commodities go down.”

The flexibility extends to the portfolio manager level. Equinox’s fund currently contains five CTA programs, but that number can change, and the portfolio manager can also “shift allocations from one to another based on current conditions. [W]ith active management, to the extent there’s a catastrophic event, our investment team has the ability to make mid-course adjustments as needed. In today’s highly volatile markets, there’s a lot to be said for active management.”

From the investor perspective, though, familiarity and ease of use play a large role in the product’s attractiveness.

“Mutual funds are easy to use and they’re widely understood,” Enck says. “They provide daily liquidity. To the extent a client has any concerns whatsoever and wants to change their investment philosophy, they can get out the same day. It’s easy to utilize this type of product in a truly diversified portfolio.”

Finally, Enck says mutual funds have transparency and costs on their side.

“The fair comparison is how this product compares to public commodity pools or private multi-manager programs. The mutual fund is less expensive to administrate on an apples-to-apples basis, he says. “We’ve sharpened our pencils and we’re taking a lower management fee than we have for other products.”