Investors are beginning to understand the risks in the markets. Consequently, more are considering alternative investment strategies, like managed futures exchange traded funds, to help diminish risk exposure and enhance risk-adjusted returns.
Managed futures cover a range of strategies that utilize both long and short positions in futures contracts across various asset classes in an attempt to capture positive returns, regardless of how the underlying market is acting, writes Ryan Issakainen, Senior V.P. at First Trust Advisors on Wealth Management.
Potential investors should be aware that the underlying futures contracts can be volatile, and derivative instruments can be less liquid than other types of investments.
Nevertheless, managed futures strategies help smooth out returns over a longer period through investments with low correlations to traditional portfolio holdings, like stocks and bonds.
“Even more important than the stand-alone risk of managed futures, in our opinion, has been the potential of these strategies to reduce risk within a diversified investment portfolio,” Issakainen said. “This is primarily due to the low, and often negative, correlations between the returns of managed futures and other traditional asset classes, such as stocks and bonds.”
Managed futures have held up during periods when stocks were negative. Investors, though, should not confuse managed futures as a direct hedge for stocks.