With Rates Low, Is Now the Ideal Time to Look at Futures?

With the global economy still not at its strongest, many central banks have continued to keep interest rates low to keep economies moving.

With these rates low — and either remaining stagnant or only slowly rising — is now the right time to turn to the futures market?

"If the decision is between investing or not investing, possibly, but interest rates have been low for a long time and it is not clear that now, with the prospect of interest rate increases — albeit small and gradual — is particularly favorable," said Frances Hudson, global thematic strategist at Standard Life Investments.

Hudson said low interest rates may encourage taking larger positions, but margins can be adjusted to compensate.

"Futures are not an asset class, so the question for investors is, 'Is now a good time to invest?'" Hudson said. "If the answer is 'yes,' then futures are one way of implementing investment decisions. If the answer is that the future is looking uncertain, futures may still play a part in hedging risk or modifying exposures."

Robert Sinnott, co-portfolio manager of the Natixis ASG Managed Futures Strategy Fund with AlphaSimplex Group, said managed futures could provide a good way for investors to offset equity risk with rates low.

"Bonds have historically been a very good diversifier to equities and may continue to serve this role protecting capital if equity prices decline significantly," Sinnott said. "However, given today's low yields, investors may not profit much from holding bonds, and could potentially lose money if interest rates rise quickly. Therefore, there may be an opportunity cost to holding bonds to help offset equity risk."

Managed futures can act as a diversifier to equity risk and may have the potential to generate positive returns when stocks decline, Sinnott adds.

"Managed futures can serve a similar diversifier role as bonds, but with a different and potentially higher return opportunity," Sinnott said. "It is important to note that a higher return opportunity does come with a higher level of risk than a typical bond strategy, so managed futures should be used in the context of an equity or risk allocation, not as a simple one-for-one replacement of bonds."

As for when to add a managed futures strategy, Sinnott said it is important to understand that a systematic trend-following managed futures strategy is fundamentally a dynamic asset allocation strategy.

"It figures out when to go long and when to go short based on market momentum," he adds.

However, even with low rates, some see futures as more speculation than anything else.

"There is really no relationship between interest rates and a good time to invest in futures," said Robert Johnson, president and CEO of The American College of Financial Services. "Really, for individual investors, the word 'invest' should be replace with 'speculate.'"

Johnson said investors in the futures market take into their account what they think rates will be when they invest.

"All one is doing in a futures market is taking a position whose payoff is based on the future price of a commodity, interest rate, stock index value, etc." Johnson said. "For instance, if you agree to buy August gold futures at $1,265 per ounce, and gold is selling at the expiration date for $1,300, you will have made $35 per ounce. Alternatively, the seller of the contract will have lost $35 per ounce.

"The futures price is determined by willing buyers and willing sellers, and the market participants take into account their beliefs on interest rates," he adds. "But, systematically there is no better time to speculate in the futures markets."

More from Investing

Trump's Oil Tweets Ruining the Stock Market's Rebound?

Trump's Oil Tweets Ruining the Stock Market's Rebound?

A BJ's Wholesale IPO Is Logical Next Step

A BJ's Wholesale IPO Is Logical Next Step

Tesla Investor Pushing for More Board Changes

Tesla Investor Pushing for More Board Changes

What You Need to Know About Facebook and Europe's New Privacy Rules

What You Need to Know About Facebook and Europe's New Privacy Rules

8 Bold Moves General Motors Could Make to Rev Up Its Battered Stock Price

8 Bold Moves General Motors Could Make to Rev Up Its Battered Stock Price