Managed Futures Basics

Managed futures funds invest in futures and forward contracts on currencies, commodities, financial indices and ETFs.  The funds, called commodity pools, are run by a commodity trading advisor (CTA).  The management fees are between 0% to 3% of assets under management (AUM) and the incentive fees are between 10% to 35% of profits.  The fees are also called "2 and 20".

Most CTAs use a black box to establish trading rules.  There are managers that act as mutual fund managers and create their positions.  They are a minority though.  The rules are not static and adjusted constantly due to copycats, poor trade execution, AUM growth and changing market conditions.  The three types of black boxes are trend following, non-trend following and relative value.

Trend following strategies are based on action of the asset prices; much like technical analysis for stocks.  The moving average strategy uses the average price of an asset to buy or sell.  The moving average may be calculated in various ways:  any number of days or different weighting of prices.  If the current price is higher than the moving average, the fund buys.  If the current price is lower, the fund sells.  This strategy works well when the asset moves steadily in one direction.  It does not work well in a volatile market or a market in a narrow trading range.  The break-out strategy uses the same buy and sell signals as the moving average strategy.  Instead of using the average of prices to trigger the trade, the fund uses the price range of the asset.

Non-trend following strategies include countertrend and pattern recognition strategies.  Countertrend strategy uses models to identify trades.  Pattern recognition is similar to technical analysis of stock charts where the CTA will find trading opportunities based on the price action of the asset.

Relative value strategies invest in related futures contracts that have experienced a short term price difference. The manager may perform an arbitrage trade as the prices return to their historical relationship.

Further information on managed futures can be accessed at Attain Capital's managed futures blog.