How Managed Futures Offer Some Compelling Alternatives for Portfolios

11/09/2018 4:41 pm EST


Nell Sloane

Principal, Capital Trading Group

Among those who believe we have shifted into a new political and economic cycle, there is a growing chorus of voices who say the 10-year bull run in equities is heading toward a new direction as well, writes Nell Sloane Friday.

As such, investors are looking for investments to protect and enhance returns when this cycle ends.

For various investors - from individuals to family offices to large institutions - integrating flexible and durable strategies found in managed futures funds is now on the minds of more investors.

Let’s first take a look at the market conditions that are starting to indicate that the bulls may be getting tired. For starters, the Federal Reserve’s recent moves to bump up rates to 2.25% looks to be part of a continuation of tightening on monetary policy.

The issue for economists and traders is that will affect various asset class prices. Even with rising rates, there’s also not much room for the Fed to move these days, with interest rates still near historic lows.

There is also the issue of the U.S. debt, now topping $15.3 trillion. Some wonder when that number begins to catch up with the market. The interest owed on that is forecast to triple in the coming decade to nearly $1 trillion per year, according to the Congressional Budget Office.

Countering that is an economy that continues to grow, employment and consumer spending figures that are strong and solid corporate earnings. 

Of course, there is no telling when the bull market will end or just how severe the next downturn will be.

So what to do about it? For more portfolios, the key is true diversification. What that means is investors are seeking investments that can go short fairly easily when markets turn. They also are looking for liquid markets that allow for efficient trading, such as the listed derivatives markets. And they are looking for investments that enable notionalized trading - which allows investors to put up a percentage of cash that still meets the minimum cash investment. Managed futures funds can do just that.

Finally, managed futures fall under favorable tax treatment, sometimes called the 60/40 tax treatment. Specifically, it is IRS Section 1256 that allows 60% of a gain or loss to be considered “long-term” and 40% as “short-term” regardless of how long you hold the trade. That is a more favorable treatment than other asset classes. (Capital Trading Group, LLLP and its affiliates do not provide tax, legal or accounting advice.  You should consult your own tax, legal and accounting advisors before engaging in any transaction.) 

Given all of that, what might investors look for in the coming months and years?

For one thing, managed futures boast a number of trading styles, methods and focus on various asset classes. Some are focused on options strategies in the futures markets. Others are trend-following systems that can be done by algorithm or perhaps as a discretionary fund run by a human trader. Along with a diversity of trading styles and strategies, managed futures delve into a variety of asset classes. 

There are some market sectors and asset classes that are not correlated with stock markets. As such, they can serve as a shock absorber for portfolios when the markets turn. Some may offer capital preservation but for most investors, such managers are looking liquid asset classes that profit when traditional stock markets are falling. This may ultimately offset equity and bond losses, or it can enhance a defensively postured portfolio as well. 

The next market cycle has not occurred. But by most accounts, it's on its way. This could be the best time to get into position for the next cycle that comes our way.  Diversifying a portfolio doesn't necessarily translate into leaving stocks and going into another asset class.   

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