ALTAVRA | Benefits of Managed Futures: Potential Enhanced Portfolio Returns (Printable Version)

Benefits of Managed Futures

Potential For Enhanced Portfolio Returns

CFTC Risk Disclosure Statement

THE RISK OF LOSS IN TRADING COMMODITIES CAN BE SUBSTANTIAL. YOU SHOULD THEREFORE CAREFULLY CONSIDER WHETHER SUCH TRADING IS SUITABLE FOR YOU IN LIGHT OF YOUR FINANCIAL CONDITION. THE HIGH DEGREE OF LEVERAGE THAT IS OFTEN OBTAINABLE IN COMMODITY TRADING CAN WORK AGAINST YOU AS WELL AS FOR YOU. THE USE OF LEVERAGE CAN LEAD TO LARGE LOSSES AS WELL AS GAINS.

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Portfolio Diversification: Potential For Enhanced Portfolio Returns

Does the addition of a managed futures component to a portfolio enhance overall returns?

The Chicago Board of Trade's booklet, “Managed Futures, Portfolio Diversification Opportunities,” shows a portfolio with the greatest risk and least returns comprised of 55% stocks, 45% bonds, and 0% managed futures while a portfolio exhibiting the greatest returns and least risk, comprised 45% stocks, 35% bonds, and 20% managed futures.

Managed Futures: The Impact of Portfolio Diversification

Source: CBOT

Past performance is not necessarily indicative of future results.

The following chart shows the return expectancy curve generated by the addition of managed futures to a traditional portfolio:

Impact of incremental additions of managed futures to the traditional portfolio.

Source: CBOT

Past performance is not necessarily indicative of future results.

Hypothetical example of a managed futures component within a portfolio:

The following hypothetical example should assist in better understanding how a relatively small investment in managed futures can enhance overall portfolio performance:

A $500,000 portfolio of stocks and bonds returning a 10% profit would yield a profit of $50,000.

Now let's assume your total portfolio is $500,000 and you invest 80% in stocks and bonds ($400,000) and 20% in Managed Futures ($100,000). Let's assume at the end of the year you realize a 10% return on your stocks and bonds and a 25% return on managed futures. The result would be as follows:

$500,000 Portfolio % of Portfolio Return
Stocks & Bonds	$400,000 80% allocation	10% Profit: $40,000
Managed Futures	$100,000 20% allocation	25% Profit: $25,000
		Total Profit: $65,000

Now let's assume you earn 10% on the 80% of your portfolio invested in stocks and bonds, but lose 25% in managed futures. The results would be as follows:

$500,000 Portfolio % of Portfolio Return
Stocks & Bonds	$400,000 80% allocation	10% Profit: $40,000
Managed Futures	$100,000 20% allocation	10% Loss: ($25,000)
		Total Profit: $15,000

As evidenced in the hypothetical example shown above, by investing just 20% of your portfolio in futures the overall portfolio performance was significantly enhanced on a percentage weighted basis.

You can also see that a 25% loss in managed futures would still leave you with a net profit of $15,000 if your stock and bond allocation returned 10%.

Important Disclaimer: The above hypothetical example is strictly for illustration purposes only, to help you better understand the potential impact of portfolio diversification. In no way is the example to be construed as the returns you might receive in stocks and commodities. Of course, in actual investing, your results can be better or worse. The risk of loss exists in futures trading.

THE RISK OF TRADING FUTURES, OPTIONS AND OFF-EXCHANGE FOREX CAN BE SUBSTANTIAL. PAST RESULTS ARE NOT NECESSARILY INDICATIVE OF FUTURE RESULTS.

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