Managed Futures

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Managed Futures

By: Y. Black

Managed Futures Explained

Managed futures function similar to mutual funds, except that instead of a group of stocks, it is a group of futures contracts, government securities, and/or options on futures contracts that are managed in a single account. An account can also include commodity pools or commodity funds. These accounts are managed by profession traders known as Commodity Trading Advisors or CTAs who are regulated in the US by two separate entities: the Commodity Futures Trading Commission and the National Futures Association. CTAs manage your futures account by going either long or short on futures contracts of all kinds, including commodities like grain, metals, fuel; financial instruments like government bonds and foreign currencies; or even various indexes themselves, like the S & P 500. Fees are paid to your CTA either on a per-trade basis or as a percentage of the profits earned on the account.

What are Futures Contracts?

Much as the name suggests, a futures contract is a standardized contract to buy or sell futures at a specific date in the future for a specific price. Typically futures contracts are arranged for the sale or purchase of either commodities (tangible goods) or financial instruments (cash settlements). Note that the vast majority of commodity-based futures contracts actually result in the purchase of goods. Rather these contracts are traded on futures exchange markets in a manner similar to that of stocks. In other words, purchasing a futures contract for wheat will not actually result in the delivery of 5,000 bushels of wheat showing up on your doorstep - unless your contracts are not properly managed and the settlement date is reached before the contract is sold.

Commodities futures contracts involve tangible goods that are not subject to market-driving pricing fluctuations. Examples of commodities include oil, grains, metals, livestock, and other agricultural goods. While different farmers grow slightly different crops of wheat and different countries drill oil that may vary slightly from others, generally speaking products like these generally do not vary from producer to producer. Stereo systems, on the other hand, are not commodities because one manufacture's product can be dramatically better or worse than another manufacturer's. The available market determines the price of a stereo.

Futures contracts that are based on financial instruments generally fall into one of three categories: interest rate or credit instruments; stocks or stock indexes; or foreign currencies (also called fx or forex). Interest rate or credit financial futures contracts involve the fluctuation of specific types of interest rates - as in a US 30-year treasury bond, or the federal funds rate (the interest rate at which banks lend money to other banks). Stock or stock index futures contracts are based on the fluctuating price of individual stocks or the level of entire indices of stocks. For example, in the US, you can purchase futures contracts on the Dow Jones Industrial Average or the S & P 500. Forex futures contracts sold in the US are based on the strength or weakness of a foreign country's currency in relation to that of the United States.