-
What exactly is a managed futures account?
It is like any other brokerage account established to trade in futures except that the responsibility for determining what trades to make and at what time, including discretionary authority to direct trading for the account, is delegated to a professional trading advisor. In this sense, the advisor is the account "manager." As is discussed in greater detail in the section titled Investment Products (see Fees) the advisor's compensation typically consists of a management fee based on the size of the account plus an incentive fee contingent on account profitability. For additional information see the link CISDM which will bring you to the University of Massachusetts (Amherst, MA) Center For International Securities and Derivatives Markets as well as their publication The Benefits of Managed Futures.
-
What types of investors utilize managed futures accounts?
It's traditionally been individual high net worth investors seeking the profit opportunities of futures trading but without the responsibility and demands of daily account management. Recently, however, growing numbers of corporate and institutional investors have been allocating some portion of their total portfolio assets to specially designed and professionally managed futures trading programs. The total amount of capital in managed futures programs is estimated to exceed $40 billion.
What's been responsible for growth in managed futures trading?
Several factors have impacted growth: First, as traditional markets have become increasingly volatile - and vulnerable to often unexpected events --- institutional money management and other sophisticated investors have sought to more effectively manage overall portfolio risk through diversification. Indeed, risk and diversification are major concerns in today's market environment; Secondly, many investors are seeking higher rate of return. A number of studies indicate that a portfolio that includes managed futures can yield appreciably higher and more stable return over time than a portfolio that includes only stocks and bonds. The same evidence indicates this can be achieved without added portfolio risk. (See next question). Still another factor in the growth of managed futures has been the tremendous broadening of futures on a global basis to encompass stock indexes, debt instruments, international currencies, and options as well as conventional commodities including metals and energy. These new investment vehicles have created new categories for profit potential as well as a mechanism to lower overall portfolio risk.How are profitability, volatility and risk affected when managed futures are included in an investment portfolio?
Harvard Business School Professor John E. Lintner found that including managed futures in a portfolio have the potential to "reduce volatility while enhancing return." And that such portfolios "have substantially less risk at every possible level of return than portfolios of stocks, or stocks and bonds." For the period of January 1, 1980, to December 31, 1998, data show that managed futures investments (as measured by the Barclay CTA Index) had a compound annual return of about 15.8%. That compares very favorably with the 17.7% return that common stocks had during the same period, one of the strongest stock markets in U.S. history. Further, it exceeded the 11.8% return on bonds. Moreover, during a similar period (Jan. 1, 1980, to December 31, 1997), analysis showed that a portfolio that comprised some managed futures had similar profitability with far less risk. For additional information see the CBOT publication Managed Futures – Portfolio Diversification Opportunities. -
All things considered, why can investment portfolio performance be improved by including managed futures?
There's no single reason, but high on the list is that managed futures may perform best when other investments are performing relatively poorly On the occasions of the S&P 500's two worst declines during the past decade, managed futures recorded net profits of 9.7% and 18.6%. A study by University of Massachusetts Finance Professor Thomas Schneeweis compared the S&P's worst 12 months and best 12 months since 1985 and found that managed futures posted gains during both periods. An important advantage of futures is the opportunity they provide to respond swiftly on a highly leveraged basis whenever and wherever in the financial and commodity markets major price movements occur - either upward or downward - and to do so without liquidating other investment holdings or adding to overall portfolio risk. It should not be assumed all portfolios including managed futures accounts have had - or will have - the same or similar results. Investment performance is influenced by the structure of the portfolio, market conditions, and the success of the trading advisor.
Is a managed futures account appropriate as a short-term investment?
No. Futures markets, like most markets, tend to be cyclical. Moreover, even an advisor who is highly successful over the course of a year may - and probably will - experience some months in which losses are incurred. Thus, while you are free to close an account at any time, it's probably not a prudent investment strategy to establish an account that you don't plan to maintain for at least one year. Does having a managed futures account lessen the risk of futures trading?
There is no method of futures trading that doesn't involve risk and consistent throughout this website is the message that an account with LJM Partners should be a component of a broader portfolio strategy. The same leverage and price movements that can produce trading profits can produce trading losses. Indeed, any loss that can occur when an individual directs his own account also can occur in a professionally managed futures account. Having said this, however, one of the things that should obviously be looked for in a trading advisor is a long-term demonstrated ability to manage risks. Has the advantage of managed futures trading been increasing in recent years, and if so, why?
Most industry experts agree this has been the case, due in large measure to the increasing complexity of financial markets in general and futures markets in particular. With the complexities have come additional strategies for fine-tuning risk-reward relationships, and for using futures in conjunction with a wide array of other financial products. Recently created worldwide market linkages have likewise placed a premium on the ability to quickly analyze and act on vast amounts of information. These are capabilities that professional management is generally best able to provide. Are there other reasons why managed accounts are generally more profitable?
The growing complexity of the markets is one factor but by no means the only factor. As in most areas of investment, trading experience and trading skills are ultimately major determinants of trading success. Profitable trading in financial futures requires the discipline and temperament to respond to market realities if and when they conflict with market expectations. It requires a keen knowledge of when and how to establish positions and when and how to liquidate them. It requires the development and implementation of carefully considered trading strategies -- a trading plan and a trading system.
And the list goes on. Effective account diversification demands an insightful understanding of how various markets react with and to one another. Otherwise, attempts to diversify could prove illusory. Even institutional and corporate portfolio managers who may have experience in futures -- such as for hedging applications -- generally choose to use professional advisors to manage their futures trading investments. For most individual investors, the advantages can be even greater.Don't trading advisors differ from one another in their investment results?
Definitely. In any given year, some will recite impressive profits and others will incur losses. Still others will occupy the full range of everywhere in between. The success of your managed account will depend on the success of the advisor you select, his/her particular trading strategy and systematic market movements. How do you choose an advisor to invest with?
There are a variety of things to consider but in the final analysis it will come down to a judgment call -- yours! It will be a matter of gathering and considering information, asking questions, and choosing on the basis of your confidence in the advisor's experience and ability.
Begin by visiting with futures specialists at the brokerage firm where you are considering establishing an account. Firms that offer managed account programs generally screen the qualifications of dozens of different trading advisors to narrow the list to a few that they feel most confident in recommending at a particular time.
LJM Partners Ltd. is registered with the CFTC and is required to provide detailed "Disclosure Documents" to prospective clients. These are similar to a prospectus and contain a wealth of information about the advisor, his experience, approach to futures trading, and trading results. The Disclosure Document for LJM Partners Ltd. is available on the website page; Disclosure Document. How important is an advisor's past trading performance - the "track record?"
As the LJM Disclosure Document clearly states past performance is no guarantee of future results. An advisor who has performed well in the past may perform poorly in the future. And it is possible that someone who has performed poorly may begin to perform well. This notwithstanding, in any endeavor some individuals are obviously better at what they do than others and a track record at least confirms historical performance.
In addition, a track record can provide other valuable information about an advisor's experience, approach to trading, and amount of money under management. You'll also want to note whether performance data included in the disclosure document refers to actual trading results or to "hypothetical" or "simulated" results. Make your own decision about whether to invest in an untested trading system that may be based solely on market hindsight.
Thus, should you consider an advisor's past performance? Certainly, provided you understand its limitations and provided it's not the only factor if your consideration.What should be considered when checking an advisor's track record?
Start by considering the length and consistency of the advisor’s professional experience and performance. Sensational performance in a short time span, bluntly put, may reflect little more than extraordinarily good luck. Or, of more concern, it may reflect someone who takes greater risks than you may be comfortable with over the long haul. Or it could reflect specialization in markets that, in a given period, were especially active.
Track records are more significant the longer the period of documented performance. This provides more information about how an advisor has performed over the landscape of continuously changing market scenarios. And, very important, performance in less-than-spectacular years may be indicative of the advisor's risk management skills. That's crucial, particularly in markets that tend to be cyclical.How do advisors differ in their investment approaches?
One way is in how aggressively or conservatively your manager trades in particular markets. Advisors also differ in which markets they trade. Some specialize in particular areas -- such as financial instruments, metals, or agricultural products while others pursue profit opportunities wherever they appear to exist. If you have a preference for a particular approach, this should be taken into account.
Another difference is whether the advisor employs a "fundamental" or "technical" trading system. Fundamental meaning that trading decisions are based principally on supply and demand, and technical meaning that the markets themselves are continuously analyzed for signals to future price direction.
Even then, different advisors have developed and employ different systems and may read the markets differently. Moreover, the fundamental-technical distinction has broken down somewhat as fundamental advisors frequently employ computerized tools to pinpoint the timing of their trading decisions.
As discussed throughout this website LJM Partners Ltd. trades options exclusively on the S&P500 Futures Index. LJM Partners seeks aggressive returns with the attendant increased risk of such an investment strategy. Where will my money be when I establish a managed account?
LJM Partners Ltd. recommends Capital Trading Group, L.P. (www.capitaltradinggroup.com) (a division of MF Global, Inc.) as the brokerage firm through which you establish your account. While LJM Partners will direct trading for the account, all other account functions are performed by Capital Trading Group, L.P. including custody of funds for all clients (See Investment Products for additional information).
Is a managed futures account subject to performance bond calls?
A performance bond call is a request from the broker to deposit additional funds to the account, generally to cover losses on open positions; any futures account, managed or otherwise, is subject to them. However, a major objective of professional trading advisors is to manage and diversify their clients' investments in a way that will avoid the necessity for performance bond calls. Do managed accounts have any automatic provisions to limit losses?
If so, this will be described in the disclosure document. A loss of more than some given percentage, or losses that reduce the account value below a specified dollar amount, may trigger the liquidation of all currently open positions and a subsequent closing of the account. This "safety valve" feature is clearly one of the things to inquire about when you are considering establishing an account. Keep in mind, however, that no one can guarantee an absolute limit to the extent of losses any more than they can guarantee a given level of profit. Performance, it bears repeating, hinges on the success of your trading advisor. LJM Partners does not use computer trading or programmatic limits in this regard – rather, the expertise and experience of the firm will be leveraged to manage risk through volatile periods. If done so properly and with discipline, losses in the short term can create excess returns over the intermediate term. Who regulates Commodity Trading Advisors (CTA's)?
CTAs including LJM Partners Ltd. are regulated by the federal Commodity Futures Trading Commission (CFTC) and by the National Futures Association (NFA), the congressionally authorized self-regulatory organization of the futures industry. All trading advisors must be registered with the CFTC and those who manage customer accounts must be members of NFA**.
Advisors' disclosure documents are required to be submitted to the NFA for review in advance of distribution to prospective investors. On an ongoing basis, NFA audits disclosure documents (particularly performance information), promotional materials, and trading activities. Violations of CFTC or NFA rules can result in a loss of trading privileges and other penalties.
** You can verify an advisor's registration and NFA membership by phoning NFA toll-free at 1-800-621-3570. NFA also offers, without charge, a number of informative publications regarding its regulatory activities and futures trading.On an on-going basis, how will I know the status of my account?
Your brokerage firm, in the case of LJM Partners – Capital Trading Group, L.P. - will provide the same timely reports you'd receive if you were directing your own account. This includes immediate mailed reports of all purchases and sales, a marked-to-the-market valuation of open positions, and a month-end summary of transactions, gains, losses, open positions, and current account value. Your broker, of course, will have the same information, updated at least daily.
In addition, investors with individual Client Accounts can review their daily account values on-line through the MF Global, Inc.
eMidas website.Is there a minimum investment needed to establish an account?
Yes, generally different managed account programs have different minimums. At the least, it will be an amount the advisor and brokerage firm - given the trading approach utilized - consider adequate to achieve account diversification.
In the case of LJM Partners see the discussion on Investment Products.Are there any restrictions on withdrawing funds from the account?
With an individual Client Account – the only restriction is that you cannot make withdrawals below the minimum required balance which is determined based on the outstanding positions in the account. You will, however, be free to withdraw all funds after liquidation of any open positions. An individual Client Account can be liquidated at any time of your choosing. Similarly, if there are profits in the account, you are free to withdraw them or leave the money available for reinvestment. However, as discussed above an investment with LJM Partners should not be considered a short term investment- investors should consider an investment timeline of between 1-3 years. Any final words of advice?
Do your homework and speak with your personal investment advisor. Review the advantages of a managed futures account within the broader context of your personal investment goals, portfolio and tolerance for risk. Choose your trading advisor with considerable care. For the right investors, teamed with the right advisors, today's futures markets are providing increasingly attractive and diverse investment opportunities.