1. Managed Futures:
Portfolio Diversification Opportunities
Enhance returns and
lower overall volatility.
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DOCUMENT AND ADDITIONAL INFORMATION
ON MANAGED FUTURES FROM CME GROUP
2. In a world of increasing volatility, CME Group is where the world comes to manage risk across
all major asset classes – interest rates, equity indexes, foreign exchange, energy, agricultural
commodities, metals, and alternative investments like weather and real estate. Built on the
heritage of CME, CBOT and NYMEX, CME Group is the world’s largest and most diverse derivatives
exchange encompassing the widest range of benchmark products available. CME Group brings
buyers and sellers together on the CME Globex electronic trading platform and on trading floors
in Chicago and New York. We provide you with the tools you need to meet your business objectives
and achieve your financial goals. And CME Clearing matches and settles all trades and guarantees
the creditworthiness of every transaction that takes place in our markets.
Futures trading is not suitable for all investors, and involves the risk of loss. Futures are a leverages
investment, and because only a percentage of a contract’s value is required to trade, it is possible
to lose more than the amount of money deposited for a futures position. Therefore, traders should
only use funds that they can afford to lose without affecting their lifestyles. And only a portion of
those funds should be devoted to any one trade because they cannot expect to profit on every
trade. All orders are entirely at your risk, and it will be your responsibility to monitor these orders.
There are limitations to the protection given by stop loss orders therefore we give no assurance
that limit or stop loss orders will be executed, even if the limit price is met, in full or at all.
3. CME Group Managed Futures: Portfolio Diversification Opportunities
WHAT ARE MANAGED FUTURES?
The term managed futures describes an
INVESTMENT UNIVERSE
industry comprised of professional money
managers known as commodity trading
advisors (CTAs). These trading advisors TRADITIONAL ASSET CLASSES ALTERNATIVE ASSET CLASSES
manage client assets on a discretionary
basis using global futures markets as an Cash Hedge Funds
Bonds Managed Futures
investment medium. Trading advisors Equities Private Equity
take positions based on expected profit Real Estate Credit Derivatives
potential.
Managed futures are an asset class in their own right, separate from traditional
investments such as stocks and bonds.
THE GROWTH OF THE MANAGED FUTURES INDUSTRY
In the last 10 years, 220
200
assets under 180
management for
160
USD (in billions)
140
the managed futures 120
100
industry have grown 80
60
an unprecedented 40
20
700%. 0
1988 1990 1992 1994 1996 1998 2000 2002 2004 2006
Source: BarclayHedge, Ltd.
Managed futures have been used successfully by investment management professionals For the purposes of this booklet, managed futures do not include
futures accounts where futures are used in risk-management
programs or hedge funds. Those funds may be used to dynamically
for more than 30 years. Institutional investors looking to maximize portfolio exposure adjust the duration of a bond portfolio or to hedge the currency
exposure of a foreign equity portfolio.
continue to increase their use of managed futures as an integral component of a well-
diversified portfolio. With the ability to go both long and short, managed futures are
highly flexible financial instruments with the potential to profit from rising and falling
markets. Moreover, managed future funds have virtually no correlation to traditional
asset classes, enabling them to enhance returns as well as lower overall volatility.
Recent growth in managed futures has been substantial. In 2002, it was estimated that
more than $45 billion was under management by managed futures trading advisors. By
the end of 2007, that number had grown to more than $200 billion.
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BENEFITS OF MANAGED FUTURES
CME Group Managed Futures Portfolio Diversification Opportunities
CME Group Managed Futures Portfolio Diversification Opportunities
CME Group Managed Futures Portfolio Diversification Opportunities
By their very nature, managed futures The benefits of managed futures within a well-balanced portfolio include:
provide a diversified investment
1. Potential to lower overall portfolio risk
opportunity. Trading advisors can
participate in more than 150 global 2. Opportunity to enhance overall portfolio returns
markets; from grains and gold to 3. Broad diversification opportunities
currencies and stock indices. Many funds
4. Opportunity to profit in a variety of economic environments
further diversify by using several trading
BENEFITS OF MANAGED FUTURESof flexibility and discipline
BENEFITS OF MANAGEDdue to a combination
5. Limited losses FUTURES
advisors with different trading approaches.
BENEFITS OFreduced
In this example, the overall risk is
MANAGED FUTURES
by almost 82 percent from –41.0 percent
to –7.5 percent and the return also
increases almost 20 percent fromfutures
ByBy their very nature, managed +7.4
their very nature, managed futures The benefits ofof managed futures within well-balanced portfolio include:
The benefits managed futures within a a well-balanced portfolio include:
percent a diversified investment mainly
provide to anature, managed futures
provide +8.9 percent. This is
By their very diversified investment
The1. Potential to lower overall portfolio ris;k
1. Potential to lower overall portfolio ris;ka well-balanced portfolio include:
benefits of managed futures within
due to diversified investmentcan
opportunity. Trading advisors can
opportunity. Trading advisors
provide athe lack of correlation and, in
participate negative 150 global between 1.2. 2. Opportunity to enhance portfolio returns
opportunity. Trading 150 global markets;
some cases,in in over correlationmarkets;
participate over advisors can Potential to lowerenhance portfolio returns
Opportunity to overall portfolio ris;k
participate in and gold global markets; and 2.3. 3. Broad diversificationportfolio returns
some grains over 150 to to currencies
from ofgrains and gold currencies in
from the portfolio components and Opportunity to enhance opportunities
Broad diversification opportunities
the grains and Many funds furthereven
stock indices. gold to currencies anddiversify Broad diversification opportunities
from stock indices. Many funds further
diversified portfolio. There is diversify 3.4. 4. Ability to profit in variety of of economic environments
Ability to profit in a a variety economic environments
stockusing several trading advisors diversify
negative correlation between stockswith
by by using several funds further with
indices. Many trading advisors and
4.5. 5. Flexibility and a varietycombine toto environments
Ability to profit in discipline combine limit losses
Flexibility and discipline of economic limit losses
bymanaged futures as the two markets move
using several trading advisors with
independently from each other. 5. Flexibility and discipline combine to limit losses
CHART 4: OPTIMUM PORTFOLIO MIX (12/1985 – 02/2008)
CHART 4: OPTIMUM PORTFOLIO MIX (12/1985 – 02/2008)
CHART 4: OPTIMUM PORTFOLIO MIX (12/1985 – 02/2008) DIVERSIFIED PORTFOLIO
COMPARISON OF A STOCKS ONLY VS. ANNUAL RETURNS AND
MAX. DRAWDOWNS
20%
20% 10%
10% 7.4%
7.4% 8.9%
8.9%
33.3%
33.3% Managed Futures
Managed Futures
Dow Jones
Dow Jones
20% 10% 0%
0% 7.4% 8.9%
33.3% Managed Futures
Dow Jones
0%–10%
–10%
STOCKS
STOCKS DIVERSIFIED
DIVERSIFIED –7.5%
–7.5%
–10%–20%
–20%
DIVERSIFIED
DIVERSIFIED
ONLY
ONLY PORTFOLIO
PORTFOLIO
PORTFOLIO
PORTFOLIO
–7.5%
STOCKS
STOCKS
STOCKS DIVERSIFIED
ONLY
ONLY
–20%–30%
–30%
DIVERSIFIED
ONLY PORTFOLIO
PORTFOLIO
STOCKS
ONLY
–30%
–40%
–40%
33.3%
33.3% 33.3%
33.3% 40%40% 40%40%
Nikkei 225225
Nikkei MSCI World
MSCI World Stocks
Stocks Bonds
Bonds
–40% –41.0%
–41.0%
33.3% 33.3% 40% 40%
Nikkei 225
Correlation:
Correlation: MSCI World Stocks
Correlation:
Correlation: Bonds –41.0% Return
Annual Return
Annual
Dow Jones – Nikkei 225:
Dow Jones – Nikkei 225: 0.420.42 Stocks – Managed Futures:
Stocks – Managed Futures: –0.05
–0.05
Correlation: – MSCI World: Correlation: Futures – Bonds: 0.23 Annual Drawdown
Max. Return
Max. Drawdown
Dow Jones
Dow Jones – MSCI World: 0.810.81 Managed Futures – Bonds:
Managed 0.23
Dow Jones – Nikkei 225: 225: 0.42 0.67
MSCI World – Nikkei 225:
MSCI World – Nikkei 0.67 StocksBonds – Stocks:
BondsManaged Futures:
– – Stocks: –0.05 –0.07
–0.07
Max. Drawdown
Dow Jones – MSCI World: 0.81 Managed Futures – Bonds: 0.23
MSCI World – Nikkei 225:CASAM CISDM CTA Equal Weighted; Bonds: JP Morgan Government Bond Global;–0.07 Bloomberg
Managed futures: 0.67 Bonds – Stocks: Source:
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5. CME Group Managed Futures: Portfolio Diversification Opportunities
1. POTENTIAL TO LOwER OVERALL PORTFOLIO RISk
One of the tenets of modern
The main benefit of adding managed futures to a balanced portfolio is the potential to
portfolio theory, as developed
decrease portfolio volatility. Risk reduction is possible because managed futures can trade by Nobel prize-winning
across a wide range of global markets that have virtually no long-term correlation to most economist Professor Harry
traditional asset classes. Moreover, managed futures funds generally perform well during M. Markowitz, is that more
adverse economic or market conditions for stocks and bonds, thereby providing excellent efficient investment portfolios
can be created by diversifying
downside protection in most portfolios.
among asset classes with
CORRELATION OF SELECTED ASSET CLASSES*
low to negative correlations.
Adding a managed futures
Managed futures Bonds U.S. stocks fund to a portfolio of
Managed futures 1.00 0.30 –0.23 traditional stocks and bonds
Bonds 0.30 1.00 –0.29 has the potential to reduce
risk and improve performance.
U.S. stocks –0.23 –0.29 1.00
*Based on a 10-year period ending December 31, 2007
1) Managed futures: Barclay CTA Index;
2) Bonds: Lehman Brothers Long-Term U.S. Treasury Index;
3) U.S. stocks: S&P 500 Total Return Index;
Source: BarclayHedge, Ltd.
2. OPPORTUNITY TO ENHANCE OVERALL PORTFOLIO RETURNS
While managed futures can decrease portfolio risk, they can also OPTIMUM PORTFOLIO MIX (01/1987 – 02/2008)*
simultaneously enhance overall portfolio performance. The following
RETURN P.A.
12%
chart illustrates that adding managed futures to a traditional portfolio 100% Managed Futures
11%
20% Managed Futures
improves overall investment quality while also potentially reducing risk. 40% Stocks
10%
This has been substantiated by an extensive bank of academic research, 40% Bonds
Increase returns
9%
beginning with the landmark study by Dr. John Lintner of Harvard
University in which he wrote: “… the combined portfolios of stocks 8%
50% Bonds
(or stocks and bonds) after including judicious investments … in 7% 50% Stocks
leveraged managed futures accounts show substantially less risk at VOLATILITY
6% 7% 8% 9% 10% 11% 12%
every possible level of expected return than portfolios of stocks
Reduce risk
(or stocks and bonds) alone.” 1
*1) Managed futures: CASAM CISDM CTA Equal Weighted;
2) Stocks: MSCI World;
3) Bonds: JP Morgan Government Bond Global;
Source: Bloomberg
Including up to 20 percent of total investments in
managed futures funds enhances portfolio diversity
and therefore promotes greater independence from
general market moves.
1 Lintner, John, “The Potential Role of Managed Commodity Financial Futures Accounts (and/or Funds) in Portfolios of Stocks and 3
Bonds,” Annual Conference of Financial Analysts Federation, May 1983.
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CME Group Managed Futures Portfolio Diversification Opportunities
3. BROAD DIVERSIFICATION OPPORTUNITIES
3. Broad diversification MANY DIFFERENT FUTURES MARKETS
MANY DIFFERENT FUTURES MARKETS
opportunities Managed futures are highly flexible financial instruments traded on many regulated
Managed futures are highly flexible financial instruments traded on many regulated
financial and commodity markets around the world. By broadly diversifying across
financial and commodity markets around the world. By broadly diversifying across
global markets, managed futures can simultaneously profit from price changes in stock,
global markets, managed futures can simultaneously profit from priceas well as from diverse commodity markets having
bond, currency and money markets,
changes in stock,
bond, currency and money markets, as well no from diverse commodity markets having
virtually as correlation to traditional asset classes.
virtually no correlation to traditional asset classes.
DIVERSIFICATION OF FUTURES MARKETS
FX (4%) Interest Rates (44%)
Australian Dollar Japanese Yen 1-Month LIBOR 10-Year U.S. Treasury Note International futures
Brazilian Real Korean Won 30-Day Federal Funds 30-Year U.S. Treasury Bond
British Pound Mexican Peso Eurodollar CME 10-Year Swap Rate Futures exchanges are continuing
Canadian Dollar New Zealand Dollar Euroyen
Chinese Renminbi Swiss Franc to adapt to growing
Euro FX
Individual Equity (9%) consumer demand
Metals (4%) Deutsche Telekom
Copper Allianz with more and more
Palladium SAP
Platinum Deutsche Bank new futures contracts
Munchener Ruckversicherung
Energy (6%) Banco Comercial Portugues Stock Futures entering the market. In
Brisa Autoestradas de Portugal Stock Futures
Ethanol
Crude Oil
recent years, futures
Equities (24%)
Natural Gas
contracts were issued on
Commodities (9%) Bovespa MSCI EAFE
Corn Rough Rice Frozen Pork Bellies
CAC 40 MSCI Emerging Markets ethanol, water and even
Dax S&P MidCap 400
Oat
Soybean
Random Length Lumber
Wood Pulp
Lean Hogs
S&P-GSCI
Dow S&P 500 the weather.
euro stoxx50 S&P SmallCap 600
Wheat Butter Livestock Hang Seng
The above list is only a partial list of the futures products currently available around the world. Source: FIA 2007
LONDON
FRANKFURT
CHICAGO PARIS BUSAN
DALIAN
NEW YORK TOKYO
SHANGHAI
MEXICO
MUMBAY
(BOMBAY)
SÃU PAULO
SYDNEY
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7. CME Group Managed Futures: Portfolio Diversification Opportunities
EASE OF GLOBAL MOST ACTIVELY-TRADED FUTURES CONTRACTS
DIVERSIFICATION
NORTH AMERICA ASIA EUROPE
The substantial growth of futures CME Group Dalian Commodity Exchange London International Financial
(DCE) Futures and Options Exchange
exchanges across the globe afford trading Corn
(LIFFE)
Soybeans No.1 Soybeans
advisors countless opportunities to SoyMeal 3-Month Sterling
30-Year Treasury Bond
diversify their portfolios by geographic 3-Month Euribor
10-Year Treasury Note Tokyo Commodity Exchange Long Gilt
markets, as well as by product. Trading E-mini Dow Jones (TOCOM)
FTSE 100 Index
advisors thus have ample opportunity for Eurodollar Gold
All Futures on Individual
Euro FX Gasoline Equities
profit potential and risk reduction among
E-mini S&P 500 Index
National Stock Exchange of London Metal Exchange (LME)
a broad array of non-correlated markets. E-mini NASDAQ-100 India (NSE)
High Grade Primary Aluminum
Investing in managed futures on a global Light, Sweet Crude Oil S&P CNX Nifty Index
Copper – Grade A
Natural Gas All Futures on Individual
scale provides protection against geo-
Gold Equities International Petroleum
specific variables such as poor weather or Unleaded Gasoline Exchange (IPE)
korea Futures Exchange
political unrest, which could affect some (kOFEX) Brent Crude Oil
Mexican Derivatives Exchange
commodities or financial futures more (MexDer) KOSPI 200 ParisBourse (formerly
TIIE 28 MATIF and MONEP)
than others.
AUSTRALIA Copper
SOUTH AMERICA Eurex (formerly DTB
Sydney Futures Exchange
(SFE) and SOFFEX)
Bolsa de Mercadorias &
3-Year Treasury Bonds Dax
Futuros (BM&F)
DJ Euro Stoxx 50
U.S. Dollar
Euro-BUND
One-Day Inter-Bank Deposit
Euro-BOBL
Euro-SCHATZ
Source: FIA 2007
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4. OPPORTUNITY TO PROFIT IN A VARIETY OF ECONOMIC ENVIRONMENTS
Managed futures trading advisors can MANAGED FUTURES VS. A TRADITIONAL PORTFOLIO DURING STOCK MARKET DECLINES
generate profit in both increasing or 8% Managed futures
decreasing markets due to the their ability Traditional portfolio of
6% 50% stocks and 50% bonds
to go long (buy) futures positions in
4%
anticipation of rising markets or go short
2%
(sell) futures positions in anticipation
0%
of falling markets. Moreover, trading
MAR 01
OCT 87
AUG 88
AUG 90
SEP 90
AUG 97
JAN 00
FEB 01
SEP 01
MAR 90
advisors are able to go long or short with –2%
equal ease. This ability, coupled with –4%
their virtual non-correlation with most –6%
traditional asset classes, have resulted in –8%
managed futures funds performing well
Managed futures: CASAM CISDM CTA Equal Weighted; Stocks: MSCI World;
relative to traditional asset classes during Bonds: JP Morgan Government Bond Global; Time scale: 01/1987 – 02/2008
adverse conditions for stocks and bonds.
WHEN CRITICAL EVENTS OCCUR (01/1984 – 02/2008)
For example, during periods of
+1600%
hyperinflation, hard commodities such Long-Term Capital Management lost $4.6 billion (1998) +1200%
as gold, silver, oil, grains and livestock +1000%
+800%
tend to do well, as do the major world
MANAGED FUTURES +600%
currencies. Conversely, during deflationary
Black Monday +400%
times, futures provide an opportunity to
September 11, 2001
profit by selling into a declining market U.S. STOCKS +200%
with the expectation of buying, or closing
out the position, at a lower price. Trading
advisors can even use strategies employing Persian Gulf War (1990)
options on futures contracts that allow for 0%
profit potential in flat or neutral markets.
1984 1986 1988 1990 1992 1994 1996 1998 2000 2002 2004 2006 2008
This ability to accommodate and Managed futures: CASAM CISDM CTA Equal Weighted; Stocks: Dow Jones Index; Logarithmic scale; Source: Bloomberg
protect against unpredictable events
can be invaluable in today’s volatile As the above chart shows, during the stock market crash in 1987, panic hit the
global markets. stock markets following the largest one-day loss in history. Managed futures
reported above 20 percent returns. Similarly after the terrorist attacks of 9/11,
the stock market plummeted 16.3 percent. In contrast, managed futures gained
8.3 percent in the same period.
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9. CME Group Managed Futures: Portfolio Diversification Opportunities
5. LIMITED LOSSES DUE TO A COMBINATION OF FLEXIBILITY AND DISCIPLINE
POTENTIAL TO LIMIT WORST DRAWDOWNS IN COMPARISON
S&P 500
DRAWDOWNS Managed Dow Jones Total Return MSCI World FTSE 1000 DAX Nikkei 225 NASDAQ Comp
Futures (index) (index) (index) INDEX (index) (index) (index)
Drawdowns, or the reduction a fund might 0%
experience during a market retrenchment, –10%
are an inevitable part of any investment. –20%
However, because managed futures –30%
trading advisors can go long or short – and –40%
typically adhere to strict stop-loss limits – –50%
managed futures funds have limited their –60%
drawdowns more effectively than many –70%
other investments. As the following chart –80%
shows, drawdowns for managed futures –90%
Managed futures: CASAM CISDM CTA Equal Weighted; Time scale: 11/1990 – 02/2008; Source: Bloomberg
have been less steep than those for major
global equity indices. The chart above shows the worst historic drawdowns for each of the indices
from 11/1990 through 02/2008.
DRAWDOWN DURATIONS IN COMPARISON
ABILITY TO RECOVER QUICKLY
1990 1992 1994 1996 1998 2000 2002 2004 2006 2008
Additionally, managed futures generally 0%
–5%
have shorter recovery times from
–10%
drawdown periods. This is due in part MANAGED FUTURES
–15%
to the ability to use short trading to take 01/1992 – 04/1992: –9.3%
–20%
advantage of falling markets, as well as the
–25%
fact that managed futures often have lower –30%
losses to recover. –35%
STOCKS
09/2000 – 09/2002: –44.7%
–40%
Unable to use short trading to take
–45%
advantage of falling markets, traditional
stock indices may experience extreme
drawdowns in bear markets. With
reference to the previous chart, the
maximum drawdown for stocks was
–44.7 percent during the period of
09/2000 through 09/2002. It takes
much longer to make up for such large
drawdowns. To simply recover, the stock
index needed to regain almost 80 percent
of its new low level.
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THE EFFICIENCIES AND PERFORMANCE
OF FUTURES MARKETS
While managed futures are new to some, COMPARISON OF PERFORMANCE (01/1980 – 02/2008)
banks, corporations and mutual fund +5,500%
Managed Futures1
managers have used futures markets to +5,000% $513,467
manage their exposure to price change for +4,500%
decades. Futures markets make it possible +4,000%
for these companies “to hedge” or transfer
+3,500%
their risk to other market participants, U.S. Stocks2
+3,000% $287,890
including speculators, who assume this
+2,500%
risk in anticipation of making a profit.
+2,000%
Without speculators, price discovery +1,500%
would only occur when both a producer +1,000%
and an end user want to execute a +500%
International Stocks3
transaction at the same time. When 0% $111,850
$10,000
speculators enter the marketplace, the
1980 1982 1984 1986 1988 1990 1992 1994 1996 1998 2000 2002 2004 2006 2008
number of ready buyers and sellers
1) Managed futures: CASAM CISDM CTA Equal Weighted; 2) U.S. stocks: S&P 500 Total Return; 3) International stocks: MSCI
increases and hedgers are able to execute World; Source: Bloomberg; All material is property of MSCI. Use and duplication subject to contract with MSCI.
larger orders at their convenience without
Over the past 27 years, managed futures have outperformed almost every
effecting a dramatic change in price –
other asset class, including high-performing S&P 500 Total Returns.
providing additional liquidity, which helps
ensure market integrity. By selling futures
when prices are rising and purchasing Looking back over the past few decades, managed futures have consistently
as prices fall, their activity can have a outperformed other asset classes such as stocks and bonds. Consider an initial
stabilizing effect in volatile markets. investment of $10,000 invested in 1980. If placed in a U.S. stock fund mirroring the
S&P 500, the investment would have been worth approximately $288,000 as of early
2008. Allocating the same amount to a basket of international equities reflecting the
Morgan Stanley Capital International Index of world stocks, the initial investment would
have grown to nearly $120,000. But the same investment in managed futures, based on
the Center for International Securities and Derivatives Markets weighting, would now
be worth more than $513,000.
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11. CME Group Managed Futures: Portfolio Diversification Opportunities
MANAGED FUTURES TRADING STRATEGIES
Fund managers’ investment strategies tend employ discretionary systems based on Market-neutral traders tend to seek profit
to fall into one of two primary categories: fundamental data and the discretion of from spreading between different financial
the major group is known as trend the fund manager, the majority use fully and commodity markets (or different
followers, while the other is comprised of automated technical trading systems based futures contracts in the same market).
market-neutral traders. on a highly objective, disciplined set of Also in the market-neutral category are
rules predefined by the fund management. option-premium sellers who use delta-
Many trend followers use proprietary
By removing human emotion, such as neutral programs. Both spreaders and
technical or fundamental trading
fear and greed, from trading decisions, premium sellers aim to profit from non-
systems which provide signals of when
fully automated trading systems rely on directional trading strategies.
to go long or short in anticipation of
predetermined stop-loss orders to limit
upward or downward market moves
losses and let profits run.
(trends). While some trend followers
TYPES OF INVESTMENT OPPORTUNITIES
A) Retail or public pools B) Individual accounts C) Private pools
The recent introduction of low minimum- Individual accounts are customized Private pools combine money from several
investment levels for retail funds or public accounts for institutional investors or high investors and usually take the form of a
pools provides a way for small investors net-worth individuals. These funds usually limited partnership. Most of these pools
to participate in an investment vehicle require a substantial capital investment so have minimum investments that can be
formerly exclusive to large investors. the advisors can diversify trading among as high as $250,000. These accounts
In the United States, fund managers’ a variety of market positions according to usually allow for admission and
business conduct and trading activities the investors’ specifications. For example, redemption on a monthly or quarterly
are supervised by the Commodity Futures certain markets may be emphasized or basis. The main advantage of private
Trading Commission (CFTC) and the excluded. Contract terms may include pools is the economy of scale that can be
National Futures Association (NFA). In specific termination language and achieved for mid-sized investors.
addition, offerings of managed futures financial management requirements.
Each of these alternatives may be
funds to the general public are regulated
structured with multiple trading advisors
by the CFTC, NFA, the Securities and
with different trading approaches,
Exchange Commission (SEC), the
providing the investor with maximum
Financial Industry Regulatory Authority
diversification.
(FINRA) and individual state regulatory
agencies. Public managed futures
funds must be audited by independent
account firms and follow strict
disclosure requirements.
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PARTICIPANTS IN THE
MANAGED FUTURES INDUSTRY
There are several types of industry participants qualified to assist interested investors. Keep in mind that any of these participants may,
and often do, act in more than one capacity.
Commodity Trading Advisors Futures Commission Merchants Investment Consultants can be
(CTAs) are responsible for the actual (FCMs) are the brokerage firms that a valuable resource for institutional
trading of managed accounts. There are execute, clear and carry CTA-directed investors interested in learning about
approximately 1,750 CTAs registered with trades on the various exchanges. Many managed futures alternatives and in
the NFA, which is the self-regulatory of these firms also act as commodity pool helping implement a managed fund
organization for futures and options operators and trading managers, providing program. They can assist in selecting the
markets. The two major types of advisors administrative reports on investment type of fund program and management
are technical traders and fundamental performance. Additionally, they may offer team that would be best suited for the
traders. Technical traders may use customers managed futures funds to help specific needs of the institution. Some
computer software programs to follow diversify their portfolios. consultants also monitor day-to-day
pricing trends and perform quantitative trading operations (e.g., margins and daily
analyses. Fundamental traders forecast Commodity Pool Operators (CPOs) mark-to-market positions) on behalf of
prices by analysis of supply and demand assemble public funds or private pools. In their institutional clients.
factors and other market information. the United States, these are usually in the
Either trading style can be successful and form of limited partnerships. There are Trading Managers are available
many advisors incorporate elements of approximately 1,250 CPOs registered with to assist institutional investors in
both approaches. the NFA. Most CPOs hire independent selecting CTAs. These managers have
CTAs to make trading decisions. CPOs developed sophisticated methods of
may distribute their funds directly or analyzing CTA performance records
act as wholesalers to the broker-dealer so they can recommend and structure
community. a portfolio of trading advisors whose
historic performance records have a low
correlation with each other. These trading
managers may develop and market their
own proprietary products or they may
administer funds raised by other entities,
such as brokerage firms.
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13. CME Group Managed Futures: Portfolio Diversification Opportunities
EVALUATING RISK FROM
AN INVESTOR’S PERSPECTIVE
As with any investment, there are risks associated with trading futures and options on Managed Futures Indexes
futures. The CFTC requires that prospective customers be provided with risk-disclosure (Actively Managed):
statements, which should be carefully reviewed. Past performance is not necessarily an • Barclay CTA Index
indicator of future results.
• MLM (Mount Lucas
When choosing a managed futures fund, it is important to ensure the fund manager has Management) Index
a proven track record. Before investing, it is also advisable to check the magnitude and • CISDM Managed Futures
duration of the fund’s worst drawdown, or cumulative loss in value from any peak in Benchmark Series
performance to the subsequent low. In addition, there are several indices that measure
managed futures performance. Investors may wish to consult each index to determine Commodity Market Indexes
which provides the most appropriate performance criteria for their needs. At right is a (Passive):
list of some of the more familiar indexes. • Goldman Sachs Commodity
Index (GSCI)
• Dow Jones-AIG Commodity
Index (DJ-AIGCI)
• Reuters-CRB Total
Return Index
HOw FEES ARE STRUCTURED
FOR MANAGED FUTURES
Total management fees in the managed under management, in addition to a account are netted before the investor is
futures industry tend to be higher than performance “incentive” fee based on charged a performance fee. The trading
those in the equity markets. While profits in the account. The performance manager assumes the netting risk by
management fees do vary according to fee is almost always calculated net of all paying each CTA according to his or her
the type of managed futures account and costs to the account, such as management individual performance.
may be negotiable, a general fee structure fees and commissions. The performance
exists. Investors should fully understand fee is thus based on net trading profits, In addition to management and
that performance information for a which are usually paid only if the account performance fees, an account or fund
managed futures account or fund is almost or fund exceeds previously established net pays transaction costs or brokerage
always expressed net of all such fees. asset values. commissions. These expenses reflect the
cost of executing and clearing futures
Typically, the trading advisor or trading A few trading managers assume the trades and generally are calculated on a
manager is compensated by receiving “netting risk,” whereby the performance per-round-turn basis.
a flat management fee based on assets results of all trading advisors in the
11
14. cmegroup.com
INVESTOR SAFETY IS PARAMOUNT
IN THE FUTURES MARKET
Protecting the interests of all participants in the futures market is the responsibility of exchange and industry members as well
as federal regulators. Working together, they ensure the financial and market integrity required by investors. A brief overview of
CME Clearing will illustrate why the credit risk of exchange-traded products is minimal for futures investors.
The market integrity of … Combined with the financial merely executes an equal and opposite
CME Group … integrity of CME Clearing transaction, usually with an entirely
CME Group rules and regulations are Clearing operations are another different party, and ends up with a net
designed to support competitive, efficient mechanism used by exchanges to uphold zero position.
and liquid markets. These rules and the integrity of the futures markets.
One of the most important financial
regulations are reviewed continuously CME Clearing 1) acts as a guarantor
safeguards in ensuring performance on
and are periodically amended to reflect to clearing member firms for trades it
futures contracts is the performance bond,
the needs of market users. Making sure maintains; 2) reconciles all clearing
which is a deposit clearing member firms
that trading practices and regulations member firm accounts each day to ensure
must post and maintain against their
are followed is the responsibility of the that all gains have been credited and all
open positions. These performance bonds,
exchange’s Market Regulation and Audit losses have been collected; and, 3) sets and
also referred to as margins, are set by
Departments, which work to prevent adjusts clearing member firm margins for
CME Clearing based on each product.
trading irregularities and investigate changing market conditions.
Your broker may require a larger deposit
possible violations of exchange and
CME Clearing settles the account of each for your account.
industry regulations. The departments
member firm at the end of the trading
provide daily on-site surveillance of CME Clearing settles its accounts daily.
day, balancing quantities of contracts
trading activity, continuous monitoring As closing or settlement prices change
bought with those sold. In clearing trades,
of member firms’ trading practices with the value of outstanding futures positions,
the clearinghouse substitutes itself as
state-of-the-art technology and prompt, the clearinghouse collects from those
the opposite party in each transaction,
thorough investigations of any customer who have lost money as a result of
essentially eliminating counterparty
complaints. price changes and credits those funds
credit risk. It interposes itself as the buyer
immediately to the accounts of those
to every seller and the seller to every
who have gained. Thus, before each
buyer and becomes, in effect, a party
trading day begins, all of the previous day’s
to every clearing member transaction.
losses have been collected and all gains
Because of this substitution, it is no
have been paid or credited. In this way,
longer necessary for a buyer (or seller) to
CME Clearing maintains very tight
find the original seller (or buyer) when
control over performance bonds as prices
offsetting a position. A market participant
fluctuate, ensuring that sufficient money is
on deposit at all times.
12
16. CME Group hEadquartErs CME Group Global oFFiCEs
20 South Wacker Drive info@cmegroup.com Chicago New York houston
Chicago, Illinois 60606 800 331 3332
cmegroup.com 312 930 1000 Washington d.C. hong Kong london
singapore sydney tokyo
HF111/0/1208
