The Basics On Managed Futures

Answer 1

Unlike purchasing bonds or trading stocks, managed futures are not a field that the average investor should approach without doing some significant research into the field. More so than other investments, the futures market is volatile and speculative in nature, and there is great potential for loss if approached without an understanding of how futures work.

The idea behind a futures contract is actually fairly simple; the contract obligates a buyer to buy, or a seller to sell, a particular item of value at a point in the future. These contracts can only be entered into by licensed money managers, called Commodity Trading Advisors. CTA’s are required to register with a licensing board before being certified to practice, and are subjected to rigorous background checks, audits of financial holdings, and must disclose a wealth of information about themselves before the board allows them to register as a CTA.

The reason managed futures make money is that CTA’s invest in the future of a wide variety of products, including grains, cotton, cocoa, foreign currency, bonds, and other items on which an economy can be built. If growth in the U.S. economy is slow, entering into futures contracts can help an investor cut losses acquired in a negative economic climate. When stocks and bonds are losing money, managed futures tend to do well. Like the Stock Market, the futures market allows short sales, or betting on the likelihood a commodity is not going to be trading well.

This is the key reason most investment brokers and money managers cite diversification as the key to succeeding on the investment front. Investing in a variety of different markets can help keep an investment portfolio balanced and still seeing results, even in difficult economic times.

One of the key things to keep in mind regarding managed futures is that while it is often a good investment, it requires a huge financial commitment, keeping the average person from seeing it as a viable investment option. Most managed futures require a minimum of $150,000 to build a portfolio, which is why a person must undergo such intense scrutiny to be considered a Commodity Trading Advisor. It is imperative to research both the futures market and your CTA, mitigating your risk in what is considered a volatile but highly profitable investment world.