The managed derivatives industry is, without doubt, still in its infancy. More developments and growth lie in its future than have happened in its past. Practitioners in the managed futures industry in Europe should not get depressed about how little headway they seem to have made, when they consider that unit trusts in the UK are 60 years old, and did not see huge growth in funds under management until the 1980s.

It must also be remembered that not only is the managed futures industry worldwide very young, it is also very small. This is a niche market with US$ 13-15bn, maybe US$ 21bn, under management. To put this into perspective, it may be helpful to remember that a single fund group such as Fidelity has US$ 153bn under management.

How to develop the managed futures industry to more substantial proportions is something that has occupied some of the best minds in this business for the past five years.

Until the recent development of a more formalised managed derivatives industry in Europe, much of the European lobbying came from the derivatives exchanges themselves, or, in the UK, the work of the Joint Exchanges Committee (now known as the Futures and Options Association and outlined in the Useful Addresses section at the end of this report). These institutions are working to achieve the regulatory or taxation changes essential to promote the direct use of their derivative products.

The result of all that good work was that the usefulness of futures and options for hedging purposes, at the very least, became accepted by even the most staid of institutional investors across Europe. According to Global Investor’s survey of European pension funds published in June 1991:

One in 10 pension funds cited the use of derivative instruments as their next innovation in investment strategy. In the UK, a recent change in regulations clarified the tax position on the use of futures by pension funds, allowing them to use futures and other derivatives in investment strategies for the first time. Where pension funds are externally managed, derivatives are likely to be used in tactical asset allocation (TAA) strategies. TAA involves using derivatives to make short-term value-adding moves in the markets without disturbing a fund’s underlying asset allocation. Derivatives, however, may also be used to minimise risk as part of a hedging strategy’.

The next stage of the campaign for supporters of managed futures is to get institutions to use managed futures programmes, rather than just direct investment in futures and options, for risk management in their portfolios. This will be a slow, uphill struggle during which the managed futures industry itself is going to have to face up to a few difficult changes.

The American market has barely started in that direction. In the 1980s companies such as Eastman Kodak, Alcoa and Amoco started to put some part of their pension funds into managed derivatives programmes and it is now estimated that around half of the 200 largest pension funds in the US invest in derivatives.

The most significant development for managed futures in the US in 1991 was the decision by the managers of the Commonwealth of Virginia’s state retirement system to commit US$ 100m — of US$ 15.5 billion—to managed futures programmes. However, this 1991 initiative has not been followed by a stampede of other state pension managers, desperate to put their money into managed futures programmes.

Possibly related posts: (automatically generated)
The Outlook for Managed Futures Funds

• International Investing Concerns and Limitations Part 1
• The Outlook for Managed Futures Funds (continue)
• International Investing Concerns and Limitations Part 2
• Performance Measurement
• Regulation of Managed Futures Funds in Europe Part 5
• Regulation of Managed Futures Funds in Europe Part 7
• Regulation of Managed Futures Funds in Europe Part 8
• Regulation of Managed Futures Funds in Europe Part 12
• Regulation of Managed Futures Funds in Europe Part 4
• Managed Futures—Prudent Access to the Futures Markets