So here are some of the primary benefits of managed futures:
Managed futures may potentially achieve strong performance in bull, bear or sideways markets and have little correlation to stocks or bonds. You should ask yourself, what do I have in my portfolio now that can potentially make money regardless of market direction? If the answer is nothing, then keep reading!
Managed futures allow for additional trading strategies. Managed futures may utilize many types of strategies such as short-selling, option writing, and spread trading. More trading strategies and more trading vehicles may equal more opportunities.
Managed futures may potentially reduce overall portfolio volatility. Markets can have different relationships with one another. Some markets may have a strong positive correlation while others may have a strong negative correlation.
By investing in a wide basket of stocks, bonds and futures markets, one may potentially reduce volatility by spreading risk and simultaneously being able to take advantage of up, down or sideways markets.
Managed futures are used by institutions such as pension plans, endowments and more to attempt to generate higher returns while diversifying. Managed futures are a highly regulated industry from the exchange to Commodity Trading Advisors and Commodity Pool Operators.
The bottom line is, managed futures may provide a meaningful way to diversify risk, increase potential profit opportunities, and reduce volatility. Do managed futures have risk? Absolutely. Are managed futures for everyone? Absolutely not.
Managed futures utilize leverage and therefore gains and losses may be magnified. An investor can lose all of their money or even more than their account value in some circumstances. The risk of loss exists regardless of who is managing your money.
We recommend an allocation in managed futures of no more than 20% of one's total portfolio value, and often times far less than that.
Futures and options trading is inherently risky and unsuitable for all investors. Past performance is not necessarily indicative of future results. Stop-loss orders intended to limit losses to certain amounts may not be effective because market conditions may make it impossible to execute such orders. Option writing has unlimited risk and an investor may lose more than their original investment.
This article was written by an independent contributor, separate from TheStreet's regular news coverage.