What is Managed Futures Account: Definition and Advantages | Motilal Oswal

What is Managed Futures Account: Definition and Advantages

Deciphering Managed Futures Account

Do you know about a managed futures account as an investment option? In managed futures account trading in the futures market is managed by a third party instead of the actual owner of the funds.

Commodity pools are one of the most significant types of managed futures accounts. In general, Commodity Trading Advisors (CTAs) run these funds according to the investment’s risk and reward profile. They decide whether to opt for a long or short position in the market. 

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Other fund managers, known as Commodity Pool Operators (CPOs), invest in futures on behalf of a pool of investors. On the other hand, CTAs trade on behalf of individual clients. To generate the highest returns possible, managed-futures investing is categorised as a hedging technique.

How to trade through a managed futures account? 

A managed futures account will have access to various assets, including commodities, energy, agriculture, and foreign exchange markets. Managed futures accounts have a clearly defined trading plan that outlines their approach to the market. Here are the two most popular methods to trade through a managed futures account - 

The Market-Neutral Strategy

The primary objective of this strategy is to limit overall market exposure by combining long and short positions strategically. By targeting specific pricing anomalies, it aims to mitigate systematic risk and achieve a beta closest to zero, thus safeguarding against market fluctuations. 

There are two ways to implement this strategy: 

a. Statistical arbitrage – Statistical arbitrage methods are based on mean reversion analyses, i.e., identifying pricing variations in stocks that are anticipated to revert to the mean over time. They include establishing long and short positions simultaneously to profit from inefficient costs in correlated assets.

Example – Let's consider Adidas and Nike. A trader notices that there is a significant link between these stocks. Recently, though, there is a divergence, with Adidas' stock price lagging behind Nike's. The trader buys Adidas shares and sells Nike shares simultaneously, expecting the price relationship to revert to its means. As the prices converge, the trader closes the positions, thereby capitalising on the opportunity.

b. Fundamental arbitrage – Instead of using algorithms, fundamental market-neutral investors invest in a particular stock. They anticipate that it will eventually converge at a specific price based on their fundamental assessment of the company's future trajectory.

Example – A trader observes that McDonald's has a greater market value and better financial performance than Burger King. However, Burger King's stock is trading at a lower price-to-earnings ratio, suggesting undervaluation. The trader sells McDonald's stock while buying Burger King’s simultaneously. Prices converge when the market recognises Burger King's real value, allowing the trader to benefit from the opportunity.

Trend Following Strategy

This strategy utilises algorithmic models to analyse market trends and make predictions about whether upward or downward movements will continue. Trend traders may take a short position on an asset as its price heads downward and a long position when an asset moves up. The objective is to make money by examining different indicators, determining an asset's direction, and then placing the right deal. 

Example – Let's consider Nestle and Cadbury. Continuing the market patterns, a trader would start long positions in Nestle and short positions in Cadbury. This happens when Nestle's stock price demonstrates a steady upward trend and Cadbury's is declining. The aim is to take advantage of the trend's momentum and earn profits by continuously monitoring and following price fluctuations.

What are the perks of trading through a managed futures account?

  1. Diversification can lower portfolio risks by allocating investments across several asset categories.
  2. Professional managers utilise their expertise in analysing market trends, managing risks, and executing trades to increase profits.
  3. Flexibility and liquidity allow quick entry and exit from positions, providing opportunities to benefit from changing market conditions. 
  4. Active analysis helps in generating profits through both rising and falling markets. 
  5. Regular monitoring enables transparent reporting of the investment progress to help make informed decisions.


Related Articles: How to Make Money In F&O Trading | Know About Future & Options Span Margin Calculator | Everything You Must Know About E-mini Futures

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