DIANE HARRISON

Improving the Odds with Managed Futures

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PANEGYRIC MARKETING| MARCH 2014



Improving the Odds with Managed Futures
With uncertainty dominating world news and subsequent market reactions, investors crave any means available to help them
mitigate portfolio investment risk. 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. Lets take a look at some of the basic benefits that this strategy provides in dampening the
pain investors are all too familiar with these days.
Managed futures have low correlation to stocks and bonds, mainly due to equal facility in up or down market cycles
Able to achieve absolute returns: Commodity Trading Advisors (CTAs), 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. The chart that follows illustrates both the non
DIANE HARRISON
Improving the Odds with Managed Futures
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PANEGYRIC MARKETING| MARCH 2014


correlation and outperformance characteristics of managed futures during the past 25 years during the five largest market
draw downs.

Managed futures offers participation across market categories and in the worlds largest and most liquid markets
Market Diversification: Most managers trade across dozens or even hundreds of individual futures contracts to increase
diversification. Due in part to its deep market penetration, the growth of managed futures has risen dramatically over the
past decade:

DIANE HARRISON
Improving the Odds with Managed Futures
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PANEGYRIC MARKETING| MARCH 2014



Dynamic asset allocation: Most CTAs allocate dynamically across multiple asset classes equities, commodities, fixed income,
and currencies aiming to deploy capital where they perceive the strongest opportunity. The table below shows a
representative sampling of some of the markets CTAs participate in:

Rising Interest Rates: Managed futures are one of the few strategies that can produce positive returns in both rising and
falling interest rate environments. Investing in managed futures that include commodities and foreign currency participation
can offset a portfolios losses produced in equities and bonds when inflationary pressures impact stocks and bonds,
resulting in underperformance. With 2014 likely to be a pivotal year for the direction of interest rates, managed futures
should be a key focus for consideration in portfolio management.

Managed futures offer a variety of strategies in which to participate in the global markets
In addition to the deep market penetration, highly liquid and well-regulated markets, and the ability to profit in rising and falling
markets that CTAs can take advantage of in managed futures, there are additional ways for investors to diversify among the
trading advisors who offer managed futures strategies. Several of the most popular include:
trend following
short-term trading
sector specialists
discretionary and global macro.
NOTES & BONDS
Aussie 10yr Bond
Aussie 3yr Bond
Canadian 10yr Bond
German 5yr Bund
German 10yr Bund
German 2yr Schatz
Japanese 10yr Bond
UK Long Gilt
US 10yr Note
US 2yr Note
US 5yr Note
US T-Bond
CURRENCIES
Australian Dollar
Brazilian Real
British Pound
Canadian Dollar
Euro FX
Japanese Yen
Mexican Peso
New Zealand Dollar
South African Rand
Swiss Franc
US Dollar Index
STOCK INDICES
Australia SPI 200
Canada S&P 60
China (HK) Hang
Seng
EuroStoxx 50
France CAC 40
Germany DAX Index
Japan Nikkei 225
Japan Topix
Singapore MSCI
S. Africa JSE Top 40
Sweden OMX
Taiwan MSCI
UK FTSE 100
US DJIA
US NASDAQ
US Russell 2000
US S&P 500
US S&P MidCap400
RATE & BILLS
Aussie Bank Bill
Can. Bank Accept.
Euribor
Eurodollars
Euroswiss
Euroyen
UK Short Sterling
RATE & BILLS
Aussie Bank Bill
Can. Bank Accept.
Euribor
Eurodollars
Euroswiss
Euroyen
UK Short Sterling
PRECIOUS METALS
Gold
Silver
Platinum
Palladium
I NDUSTRIAL METALS
Aluminum
Copper
Lead
Nickel
Tin
Zinc
GRAINS
Corn
Milling Wheat
Rapeseed
Rough Rice
Soybean Meal
Soybean Oil
Soybeans
Wheat
SOFTS
Cocoa
Sugar
Coffee
Orange Juice
LIVESTOCK & MEATS
Feeder Cattle
Live Cattle
Lean Hogs
FI BERS
Cotton
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Improving the Odds with Managed Futures
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Trend following: Managers in this category use quantitative systems and models to identify trends in financial and commodity
markets. Most trend-following managers trade in over 30 different futures markets in all asset classes: equities, commodities,
currencies, and fixed income. Trend followers historically have done well when stocks are down. In good times for managed
futures overall, trend followers are often one of the best performing strategy groups. However, trend followers may experience
large or sustained draw downs, and they typically have a relatively high correlation to one another.
Short-term trading: In the short-term, markets often experience less trend behavior and more mean-reversion. Also, market
segmentation across time zones, with markets opening and closing across the globe at different times, can lead to a rich set of
opportunities in addition to trend. Short-term managers tend to trade in ten or more of the most liquid financial futures
markets: equities, currencies, and fixed income. Most short-term CTAs employ counter-trend and mean reversion trading, with
holding periods from inter-day to two weeks in duration. These CTAs historically have exhibited low draw downs and volatility
with demonstrated low correlation to other managers and strategies in managed futures.
Sector specialists: These managers offer focused participation with fundamental input in key markets or sectors (e.g. FX, fixed
income, energy, stock indices, metals, etc.). They often show low correlation to other managers and strategies, potentially
providing excellent diversification benefits.
Discretionary and global macro: Often considered the broadest category of CTAs outside of trend followers, these managers
analyze global factors and themes that are affecting the markets to formulate their strategy approach. They are well diversified
across asset classes, conceptual investing themes, and trading time-horizons. They may offer superior return potential and
attractive risk-adjusted returns. Managers typically rely on fundamental inputs which can be combined with technical analysis in
this strategy. Discretionary and global macro CTAs traditionally exhibit low correlation to other CTAs as well.
Managed futures can assist in taming the volatility that increasingly impacts the world markets
Utilizing managed futures, particularly in a thoughtful and balanced way with a portfolio focusing on the three managed futures
strategy groups that have a low correlation to trend following and to each other, can help investors improve their overall portfolio
performance. Including managed futures within a portfolio can offer investors consistent returns, help to manage volatility,
potentially constrain draw downs, and complement allocations to other assets. Its an asset class well worth devoting time to
understanding today and for the long term.

Diane Harrison is principal and owner of Panegyric Marketing, a strategic marketing communications firm founded in 2002 and
specializing in a wide range of writing services within the alternative assets sector. She has over 20 years of expertise in hedge fund
marketing, investor relations, sales collateral, and a variety of thought leadership deliverables. In 2014, the firm was awarded IHFAs
Innovative Marketing Firm of the Year for the second year in a row. In 2013, the firm was awarded IHFAs Innovative Marketing Firm of the
Year, and AIs Marketing Communications Firm of the Year- US. A published author and speaker, Ms. Harrisons work has appeared in many
industry publications, both in print and on-line. Contact: dharrison@panegyricmarketing.com or visit www.panegyricmarketing.com.