As the global marketplace develops so does the needs of the investor to create proper portfolio diversification. Until recently, traditional investment vehicles such as stocks, bonds, and real estate seemed to be sufficient for adequate diversification. With the creation of new investment vehicles, economic forces from around the world can now be combined to significantly influence your investment portfolio performance.
Today’s modern portfolio, theory and management require the addition of global markets and Alternative investment vehicles (equities, futures and commodities, and financial instruments) to complete a portfolio mix. That is the reason why a record number of individuals, institutions, pension funds and professional portfolio managers are turning to Alternative investments and professionally managed futures. Some of the best benefits include:
* Proven long-term track records
* Risk reduction and return enhancement through modern portfolio diversification
* An investment that can capitalize on rising and falling market conditions
* The leverage necessary to allow investors high rates of return combined with the same risk associated with that of a high quality stock
* Access to global markets in a cost effective and efficient manner
* Professional risk management
* Low correlation to stock and bond performance
Unique Benefits Provided by Professionally Managed Futures
The conclusion that managed futures should be included in traditional portfolios of stocks and bonds was initially reported in a 1983 study conducted by Dr. John E. Linter, a Harvard Business School professor of finance. Dr. Lintner’s study stated that, by including managed futures in an investment portfolio ,
“… reduces volatility while enhancing returns” and that such portfolios “show substantially less risk at every level of expected return than portfolios of stock (stocks and bonds) alone.”
More recently, Dr. Thomas Schneeweis conducted a study completed in June 1997 entitled “The Benefits of Managed Futures.” Dr. Schneeweis, a professor of finance at the University of Massachusetts, built upon Dr. Linter’s work and conclusions by including new performance data generated from 1985 to 1995. His study provides the supporting information to conclude that the inclusion of managed futures in traditional investment portfolios can achieve the following benefits:
1. The reduction of portfolio volatility risk, and the enhancement of returns.
2. Managed futures trade in markets, which offer investors the same market integrity and safety as stock and bond markets.
3. Managed futures are no more risky than traditional equity investments.
4. The special benefits of managed futures are derived from the risk and return opportunities that managed futures offer as additions to traditional stock and bond investment.
As stated by Dr. Schneeweis,
“Simply put, the logical extension of using investment managers with specialized knowledge of traditional markets to obtain maximum return / risk tradeoffs is to add specialized managers who can obtain the unique returns in market conditions and types of markets not generally available to traditional asset managers; that is managed futures.”
This work was again built upon by Dr Thomas Schneeweis (Professor of Finance, CISDM/SOM, University of Massachusetts) and Georgi Georgiev ( Ph.D candidate, CISDM/SOM, University of Massachusetts) and surveyed a period from 1990 to December 2001.
Their conclusions were; “This academic research looks at the role of managed futures to maximize the risk/return ratio within a diversified portfolio. With an impressive index performance of 4.19% over 2001, the figures throughout this research study demonstrate the appropriateness of ensuring that managed futures have a place in any well-diversified portfolio.”
This research paper provides evidence that managed futures:
* Reduce portfolio volatility risk.
* Enhance portfolio returns in economic environments in which traditional stock and bond investment media offer limited opportunities.
* Participate in a wide variety of new financial products and markets not available in traditional investor products.
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