Diversification Benefits of Managed Futures

Abstract

Under the Commodity Exchange Act, all individuals and firms (with certain exceptions) that intend to do business as futures professionals must register with the Commodity Futures Trading Commission (CFTC). The commission has authorized the National Futures Association (NFA), a self-regulatory organization, to receive and review applications and grant registrations. The following are two categories of futures professionals that must register: Commodity trading adviser (CTA) — A person, who, for compensation or profit, directly or indirectly advises others as to the advisability of buying or selling commodity futures or option contracts. Commodity pool operator (CPO) — An individual or firm that operates a commodity pool. A commodity pool is an investment trust, syndicate, or similar form of enterprise operated for the purpose of trading commodity futures or options contracts.

Many hedge funds, particularly those that trade futures, are registered as CTAs and even CPOs. CTAs generally can be classified as currency, financials, equity, physicals, and diversified. Most are classified as diversified (they trade several markets) and fewer are classified as physicals (they exclusively trade nonfinancial markets such as energy, metals, softs, etc.). I n this article, we examine the diversification benefits of managed futures. We examine alternative ways of investing in managed futures, discuss data sources as well as the impact of survivorship bias, and present our results as they relate to the diversification benefits of managed futures.

Keywords: Managed Futures, Commodity Futures Trading Commission, CFTC, Commodity Trading Advisor, CTA, Commodity Pool Operator, CPO

JEL Classification: G10, G11, G20, G23, G24