Managed Futures - Describing Liquid Alts
Managed futures strategies date back several decades to the emergence of commodity trading advisors, which were first formally defined as a structure by the Commodity Futures Trading Commission Act of 1974 (CFTC). This type of strategy is also often offered through commodity pool operator vehicles, which are a similar and inter-related designation also primarily regulated by the CFTC.
As the description implies, managed futures funds invest primarily in futures contracts, although many also use options and over-the-counter derivatives. Most of these funds employ trend-following strategies, although a few also utilize other quantitative methods or fundamental analysis. Managed futures strategies structured within an RIC often adopt a relatively complex legal structure to comply with the U.S. tax code. In response to the “Qualifying Income Test” enumerated in Internal Revenue Code section 851(b)(2), many of these funds are structured with wholly owned offshore subsidiaries designed to pass trading gains back to the parent fund as dividend income.
The large number of underlying indexes, commodities, and securities now covered in the global futures markets allows managed futures funds to trade and provide a proxy for a large set of asset classes including fixed income, traditional agricultural and natural resource commodities, equity indexes, and foreign exchange. Proponents of managed futures strategies often cite the historically low correlation of trend-following strategies to changes in equity prices. Because of the nature and margin structure of futures trading, many of these funds often must have significant amounts of cash on hand and the ability to earn interest on cash held as collateral, which may become a more significant component of managed futures returns in a non-zero short-term rate environment.
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