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Benefits of Investing in Managed Futures:
Detailed Explanation of Possible Benefits of Investing in Managed Futures
1. Managed Futures May Enhance an Overall Portfolio’s Rate of Return and Possibly Reduce its Risk; Thereby Affording the Possibility for Higher Than Average Returns than Returns Gained in a Conventional Stock or Stock and Bond Portfolio
Managed futures, as an asset class, is increasingly being recognized as an important investment that may potentially enhance a portfolio’s return, while lowering the overall risk and volatility. A variety of academic evidence demonstrates that incorporating Managed Futures into a portfolio of stocks and bonds creates a better balance to an investor’s portfolio. “Modern Portfolio Theory” is an investment approach first developed in 1952, by Professor Harry Markowtiz, of the University of Chicago.
Markowitz explained, in his article, “Portfolio Selection,” that a portfolio’s risk could be reduced, and the expected rate of return increased, when assets with dissimilar price movements were combined. Holding securities that tend to move in concert with each other does not lower the risk. Diversification, he concluded “reduces risk only when assets are combined whose prices move inversely, or at different times in relation to each other.”
A diversified portfolio, of uncorrelated asset classes, can provide the highest returns with the least amount of volatility. Many investors are under the false impression that their portfolios are diversified because they may have different stocks and bonds. However, this theory states that while these are all different investments, they are still in the same asset class and generally move in concert with each other. In 1990, Mr. Markowitz, along with William F. Sharpe, and Merton H. Miller, won the Nobel Prize for their contribution to financial economics.
The concept of “Modern Portfolio Theory” was further advanced by the work of Harvard professor Dr. John Lintner in his 1983 study, “The Potential Role of Managed Commodities-Financial Futures Accounts in Portfolios of Stocks and Bonds”
Lintner’s conclusions stated that “…Portfolios … including judicious investments…in leveraged managed futures accounts show substantially less risk at every possible level of expected return than portfolios of stocks (or stocks and bonds) alone.”
In addition, while managed futures may in some instances decrease portfolio risk, managed futures may also simultaneously enhance overall portfolio performance. Professor John E. Lintner found that including managed futures in a portfolio “reduces volatility while enhancing return.”
The below chart illustrates that adding managed futures to a traditional portfolio improves the overall investment quality of the portfolio. As you can see, the portfolio with the greatest return, and the least volatility, includes futures.
2. Managed Futures May Perform Well when other Investments Such as stocks are Performing Poorly
Managed futures may perform well when other investments are performing relatively poorly.
Chart 2 shows that managed futures outperformed U.S. and international stocks during the worst peak-to-valley draw downs of the S&P 500, the NASDAQ, and International stocks as shown by the Morgan Stanley Capital International Index (MSCI), and the Europe, Australia and the Far East (EAFE) Index. In other words, as depicted in the above chart, during the worst drawdown of each stock index, managed futures were profitable.
3. Managed Futures are Attractive as a Stand Alone Investment and Can Provide an Opportunity for Greater Returns Than the S&P 500 Index:
Managed futures are also an attractive stand-alone investment. Managed futures are attractive because an investor can benefit from the diversification of a wide variety of global markets including agricultural products, bonds, currencies, financial instruments, metals, energies and stock indexes. In addition, managed futures investors can benefit from the efficiencies of the futures markets such as liquidity/rapid execution, and the use of leverage.
The Highlighted CTAs may possibly afford you the type of potential return you are seeking from a stand alone investment.
4. Trading Decisions Are Made by a Professional CTA
With regard to futures trading, the trading decisions are made by a trained professional who, in the U.S., is regulated by the National Futures Association (NFA) and the Commodity Futures Trading Commission (CFTC).
5. Ability to Profit in a Rising or Falling Market
An investor can profit in the futures market when the market goes up or down. For example, if a CTA thinks the market will go up, he will buy futures. Conversely, if a CTA thinks the market will go down, he can sell the futures contract short. Therefore, the investor has an opportunity to profit whether the market is going up or down.
6. Ability to Invest Tax Deferred Funds Through a Self Directed Individual Retirement Account (IRA)
As stated above, futures strategies can offer investors a number of benefits. In addition to being able to invest money from an ordinary account into the futures market, investors can also capitalize on those benefits in a tax-deferred Individual Retirement Account (IRA).
For most investors, IRA investments are generally limited to stocks, bonds and mutual funds because most investors are not aware of the many different kinds of investments which can be made through an IRA. A vast majority of financial institutions which offer IRAs, typically limit investment options to stocks, bonds, and mutual funds.
Contrary to most typical IRAs, there are certain trust custodians who accept futures accounts. Such IRA’s are often referred to as “self directed” IRAs. When you roll your assets into a self directed IRA, the assets can continue to grow tax deferred.
Before placing IRA funds into a futures account, funds from an IRA must be invested through a “self directed” IRA because an investor could suffer tax consequences if he transferred money from an IRA directly into a futures, options, or foreign exchange (forex) account. In order to avoid such tax consequences, the investor can trade futures, options and forex through a self directed IRA that is held at a trust company. “Self directed” IRAs allow you to invest in managed futures, while still maintaining tax deferred growth because the assets are contained in an IRA.
If you do not already have a self directed IRA that accepts futures trading, you will have to open a self directed IRA through a trust custodian, and then open a futures account under the trust custodian’s name. There are several trust companies or trust custodians that offer self directed IRA’s that can utilize the futures and options markets. Your broker, or RCG Managed Futures, if you do not already have a broker, can help you with the process.
Profits generated from futures transactions are taxed at the rate of 60% long term capital gains and 40% short term capital gains. All short term stock transactions are taxed at the short term capital gains tax rate. In the highest income brackets that would mean a tax saving of 30%.
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