The Managed Futures has grown enormously over the last 20-odd years from around $10 billion in assets under management in 1990, to around $200 billion at the end of 2009. The background of the futures markets started over 100 years ago as a very efficient way for companies, using commodities in their daily businesses, to limit their sensitivity to the price changes in the underlying commodities when buying or selling products.
Take the old example of a farmer selling corn or wheat to a bakery. Before the establishment of future markets, the farmers were exposed to the fact that everybody wanted to sell their wheat at the same time; come, autumn after the harvest which made his revenue lower. With the ability to sell his wheat using a wheat future, he could spread out this risk over the year and ultimately get a better understanding of revenue streams and cash flow while the reverse was true for the bakery.
Over the 20th century and particularly in the 70s and the 80s, the future markets grew dramatically and started offering more financial futures which today is the largest part of the market. (Today, futures can be bought and sold on several hundred different markets around the world including stock indices, commodities, bond indices and currencies.) At around this time, fund managers also started managing money for investors in the futures markets and the Managed Futures industry was born. Over the last three decades, Managed Futures managers have produced some impressive returns.
Managed Futures investing is primarily done by quantitative models that try to identify trends by using the price of an asset as the ultimate driver for their investment decision Managed Futures investors, likewise, go under the more explanatory name, trend followers.
The benefits with Managed Futures are that highly liquid futures markets are, therefore, very liquid investments. They can both go long and short markets in a very cost-efficient way and can then produce returns in all types of market environments. Furthermore, purchasing a Managed Futures investment is diversifying a more traditional portfolio of stocks and bonds greatly due to its non-correlation to those types of assets and to most hedge-fund styles. Below is a breakdown of how well Managed Futures functioned as a diversifier during the 15 worst quarters for the S&P 500 Index over the last 25 years.
Performance of the BTOP 50 (Barclays MF Index) - Index During 15 Worst Quarters of S&P 500 index
|Period BT OP 50 index||Event||S&P 500 Index||BTOP 50||Difference|
|Fourth Quarter 1987||Black Monday - Global Stock Markets Crash||-23.23%||16.88%||40.11%|
|Fourth Quarter 2008||Bear Market in U.S. Equities lead by Financials||-22.56%||8.73%||31.29%|
|Third Quarter 2002||WorldCom Scandal||-17.63%||9.41%||27.05%|
|Third Quarter 2001||Terrorist Attacks on WTC||-14.99%||4.12%||19.10%|
|Third Quarter 1990||Iraq Invades Kuwait||-14.52%||11.22%||25.74%|
|Second Quarter 2002||Continuing Aftermath of Technology Bubble||-13.73%||8.52%||22.26%|
|First Quarter 2001||Bear Market in U.S. Equities led by Technology||-12.11%||5.97%||18.08%|
|Third Quarter 1998||Russia Defaults on Debt, LTCM Crisis||-10.30%||10.54%||20.84%|
|First Quarter 2008||Credit Crisis, Commodity Prices Rally||-9.92%||5.91%||15.83%|
|Third Quarter 2008||Credit Crisis, Government-Sponsored Bailout||-8.88%||-3.71%||5.17%|
|Fourth Quarter 2000||DotCom Bubble Bursts||-8.09%||19.78%||27.87%|
|Third Quarter 1999||Anxiety during Run Up to Y2K||-6.56%||-0.67%||5.89%|
|First Quarter 1994||FED Begins Increasing Interest Rates||-4.43%||-2.10%||2.33%|
|Fourth Quarter 2007||Credit Crisis, Subprime Mortgage Losses||-3.82%||3.02%||6.84%|
|First Quarter 1990||Recession in U.S., Oil Price Spike||-3.81%||1.76%||5.57%|
|Source: Lintner Revisited Quantitative Analysis|
In summary Managed Futures: