The arguments against managed futures should also be addressed:

1. their insularity;
2. they are not an asset class in their own right;
3. their high charging structure.

INSULARITY

One of the most interesting arguments presented against managed futures as an acceptable investment is that their development in the US simply reflects American insularity.

The theory is that having thoroughly exploited equities and bonds, US investors did not then move on and turn their attentions to the emerging markets of the Far East or South America in the way that European investors have. Instead, they looked at derivations of their own existing markets and came up with investing in commodity futures, a choice which led to the establishment of the managed futures industry.

The conclusion to this argument is that the derivatives markets are the US equivalent to emerging markets and that Europeans, not so limited by insularity, do not need to restrict themselves thus and can find more value in the emerging markets. It is an interesting argument but one that must be flawed. Derivatives markets are not just US-based any more and nowadays can hardly be described as insular, offering investment, as they do, in all the major capital markets and in the world’s most traded commodities. Nor do the arguments of greater volatility and higher risk stand up against the emerging markets. The emerging markets have proved to be quite unstable investment fields themselves, with much the same degree of volatility in returns as those experienced by managed futures. Emerging markets are also expensive to invest in—and illiquid — and, in that the preferred route to investment in them is normally through equities, they offer little diversification of assets.

NOT AN ASSET CLASS IN THEIR OWN RIGHT

The whole question of whether or not managed futures are an asset class in their own right is one that can still cause a fierce debate. Within modern portfolio theory, the following characteristics of managed futures should mean that they are an individual asset class:

managed futures can be traded to track an index;

they can be used for passive management; they can provide expected return, standard deviation and correlations to other asset classes.

However, there are some equally clear characteristics of managed futures which imply that they are not an individual asset class. They are not, for instance, based on the same underlying assets; they are actively traded and do not present returns when stripped of their active feature.

The debate is still open on whether or not managed futures are an independent asset class, and certainly until there is a clear, industry-wide benchmark and an indexing system for managed futures performance, there can be little classification or performance measurement of them in their own right.

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The Case Against Managed Futures

• The Evolution of Managed Futures Funds
• The Origins of the Futures Industry (part 2)
• Selecting a Baseline Measurement for CTA Success Part 3
• Principles of Futures Contract Pricing (T1)
• Regulation of Managed Futures Funds in the US and Japan
• Why We Have Futures Contracts
• Principles of Futures Contract Pricing (T3)
• Managed Futures
• RETAIL SALES
• Enjoy my New Discovery of Commodity swaps