What are Managed Futures?  Let’s break this down a bit and start with a futures contract.  A futures contract is an agreement to buy or sell a set amount of a particular asset at a predetermined price and date.  The futures market is comprised of agriculture assets (sugar, corn, etc.), energy assets (natural gas, oil, etc.), currencies, interest rates and stocks.  Futures were originally developed to help producers and users manage price risk.  For example, a farmer can use the futures market to ensure that he/she is able to sell their corn at a certain price five months in the future when they harvest the corn.  Who buys such a future?  It depends.  It could be a producer like Kellogg’s that wants to lock in the price it pays for corn.  In so doing, Kellogg’s can reduce the chance of suffering a loss when it sells Corn Flakes five months from now in the event corn prices are higher at that time.

Managed futures is an investment similar to a mutual fund in that it is a pooled investment that can be managed with many different investment strategies.  As of a few years ago, managed futures were available only to high net worth individuals through what is known as Commodity Trading Advisers (“CTAs”).  Most CTAs use propriety trading strategies that they do not disclose.  Recently, managed futures have been made available to the average investor through mutual funds.  There is now over $330 billion being managed in the futures market and this market is growing rapidly.  Because there are so many strategies in the managed futures area, a full understanding of the investment strategy and built-in risk controls is paramount when investing in this space.

Why invest in managed futures?  At THOR, there are always two criteria we consider with any investment.  First, does the investment stand up on its own merits?  In the first chart below, you can see that managed futures have actually outperformed stocks since 1980.  √√.  Second, how does the investment fit into the portfolio?  In the second chart below, you can see managed futures are completely uncorrelated to stocks and bonds and offers true portfolio diversification.  In addition, both stocks and bonds are currently at the high end of their valuations.  At this time, we believe managed futures are an appropriate investment for a well managed and diversified portfolio as compared to a time period such as April 2009, when equity valuations were very low, managed futures were not a compelling investment.  √√.

Interesting fact 

Since 1981, the number of years interest rates have changed by at least 1.0% is 33 out of 33 years.

Sincerely,

Your THOR Team

Chart source: CME Group