FAQ: Professionally Managed Futures
Q: Why utilize us?
A. There are many reasons, however none more important than the fact that we provide access to a variety of funds and fund managers for the individual and institutional investor. As such, what’s equally important is the fact that we provide access to who we believe are top professional money managers. We are constantly working with our team of money managers to provide the highest level of financial services in the industry.
Q: What are alternative investments?
A. Alternative investments are a rapidly growing investment category generally including Professional Money Managers who are many times not readily accessible by the retail level or individual investor. Many of these non-traditional money management firms utilize both buy and sell strategies to capitalize on up and down movements in a variety of global markets. Additionally, What if you could make an investment that was in no way tied to what the stock market will do in the next 10 years? Such an investment could do well in the face of extended declines in the stock market, and do well if there is a market recovery. Such an investment is, by definition, lowly correlated with the stock market. This ability to achieve returns independent of stock market performance is the defining characteristic of alternative investments.
Specific Benefits of Alternative Investing:
- Returns independent of Stock Market Performance
- Reduction of risk via portfolio diversification
- Have historically performed exceptionally well during stock market crises (Black Monday - 1987, Iraq invades Kuwait – 1990, Russia defaults - 1998, DotCom crash – 2000, Terrorist attack – 2001, Credit Crisis 2007)
- Low correlation to traditional investments such as stocks, real-estate, and bonds
The allure of alternative investments lies in their ability to provide absolute returns regardless of conditions such as a strong or weak economy, high or low inflation, bullish or bearish stock market. And indeed, one of the key benefits of alternative investments is this ability to profit in virtually any economic environment.
Not surprisingly, the amount of assets allocated to alternative investments such as managed futures (VAM's specialty) has increased dramatically over the past several years as investors search for alternatives to the stock and bond markets.
Q: What can we do to help you?
A. Our services provide investors with the certainty in order to be able to act decisively as it pertains specifically to making informed decisions about their portfolio and diversification. We think that Managed Futures should be a part of your portfolio. We provide an analysis of your portfolio and what it may look like including Managed Futures.
Q: Why should I consider them for my portfolio?
A. We believe that an expanding universe of these firms have provided excellent investment returns at preferable volatility levels to traditional equity investments regardless of global economic considerations. Moreover, the investment returns generated from alternative investments often have low correlation to the overall equity market returns. They can potentially provide a hedge to your portfolio in times of crises. We believe these features are particularly beneficial during times of extreme stock investor optimism and during the bear markets that follow.
Q: Where can I find more helpful information?
A. The websites of the CME Group and the National Futures Association may be helpful.
- What are Managed Futures strategies?
Managed Futures are a diverse subset of active hedge fund strategies that trade liquid, transparent, centrally-cleared exchange-traded products, and deep interbank foreign exchange markets. Managers in this sector are called Commodity Trading Advisors (CTAs). This name goes back to the origin of the strategy when, unlike today, most CTA activity was in commodities. Currently, their strategies are largely focused on financial futures markets — equity indices, fixed income, and foreign exchange — with additional allocations to energy, metals, and agricultural markets. There are also Commodity Specialist Managers that focus mainly or exclusively on commodity markets. They may further specialize in one or more asset classes within the commodity space, such as energy or agricultural.
- Have Managed Futures strategies changed since they became popular in the 1970s?
The predominant strategy remains trend following, but this approach has evolved significantly in sophistication in recent years, and the overall space has become increasingly diverse.
»» In general, trend followers aim to identify and exploit sustained capital flows across asset classes as markets move back out of and into equilibrium, often after prolonged imbalances. Other CTA styles thrive on volatility and choppy price action that accompanies these flows, as well as a variety of other market phenomena.
»» The number and variety of short-term programs has risen sharply with the advances in trading technology, data analysis, and increased interest from quantitative traders in establishing their own trading firms.
- Why should investors include Managed Futures in their portfolios?
Managed Futures strategies can be a source of uncorrelated alpha because they are directionally unbiased, often cover a variety of time frames in their position holding periods, and have historically sought returns independently of the prevailing economic or volatility regime.
Overall, these strategies have performed well during many periods that were difficult for equity markets and other hedge fund strategies. This is a result of the internal diversification, unbiased directionality, and the risk management styles of CTAs.
The market conditions that have traditionally been difficult for CTAs employing trend following strategies have been those in which there is no follow through on trends, such that prices are mean-reverting. As a result, many CTAs incorporated additional strategies in an effort to capture these types of market characteristics as a complement to their trend following.
»» Managed Futures strategies tend to reduce portfolio variance. The addition of uncorrelated variance may also have a beneficial effect on other performance and risk metrics.
»» The exchange-listed underlying instruments used by CTAs facilitate risk management and mitigate many of the risks associated with model risk. The margining process also allows for flexible and effective cash efficiency.
On the risk side, Managed Futures present risks for investors just like any other hedge fund style. Investors can potentially experience volatility and substantial drawdowns, especially if the trading manager has set a higher return objective and takes more risk to try to obtain it. Investors should always conduct thorough due diligence to properly understand the potential risks and weaknesses of trading programs before investing. This is especially important because the trading methodologies employed by CTAs, the level of risk and return that is targeted, and the quality of the operational infrastructure of trading managers may vary widely across the space. Regarding model risk, it is important to note with any hedge fund strategy that there is no guarantee that any model will capture or properly account for every aspect of reality. Certain types of modeling techniques may be susceptible to curve-fitting or over-optimization.
- What is the general approach CTAs take to risk management?
The risk management style of trend followers tends to create a positive convexity return profile, similar to what can be achieved using options. Although there is no guarantee that risks can be strictly controlled, trend following managers generally seek to preserve upside potential and limit downside risk to predetermined levels through the use of stop-loss orders and other means.
- What is the long-term track record of Managed Futures?
The following is presented to illustrate long-term performance comparisons among Managed Futures, equities, and several leading equity hedge fund and fund of funds indices. Further information and additional comparisons can be found in CME Group’s paper, “Lintner Revisited: A Quantitative Analysis of Managed Futures in an Institutional Portfolio”
Returns – For the period of January 1980 – November 2010 the Barclay CTA Index had an average annual return of 11.55 percent vs. 7.9 percent for the S&P 500.
Correlations – During that same period, the correlation between the Barclay CTA Index and the S&P 500 was insignificant at +0.01.
- Do CTAs employ leverage in their trading?
CTAs do not employ leverage in the traditional sense of borrowing money to increase exposure. Funds that are not being used as margin can be invested in treasury securities or various liquid instruments that meet the requirements of the customer’s FCMs. Futures contracts have implicit leverage, which is generally controlled, to a large extent, by the conservative margin to equity ratios employed by CTAs. These ratios imposed by clearing firms refer to the percentage of margin in a customer account that is permitted to be deployed as margin.
Clearing firms act as third parties that aim to protect their interests by maintaining conservative margin-to-equity ratios.
It is important, however, to note that risk policies at various clearing firms and CTAs vary and that customers should inquire with their own clearing firm(s) as to what the ratio would be for the customers’ account(s).
- Are the products that CTAs trade liquid?
CTAs generally utilize the most liquid exchange-traded products with the highest level of open interest, which enables them to offer investors excellent liquidity terms.
- Do your fund managers impose gates and lockups on investors?
Our fund managers generally have liberal redemption policies, usually monthly or quarterly with no restrictions, if not better. Some fund managers offer daily liquidity. Unlike what took place in some other hedge fund strategies, CTAs generally did not impose either gates or lockups during the financial crisis of 2008 – 2009. With separately managed accounts, investors can terminate a trading manager’s power of attorney and liquidate positions themselves. Our fund managers cannot restrict customers from making withdrawals from their managed accounts.
- Is there research that supports the inclusion of Managed Futures in portfolios?
There is a substantial body of research, including John Lintner’s landmark research study in 1983 and countless recent articles, which demonstrate the portfolio benefits managed futures can offer. The Lintner research was updated and expanded recently and is available in a long and short version from CME Group.
Q: How accessible are my funds in a managed account? How do I get my money out?
A: We strongly advise you to view your investment as long-term, however part or all of your funds are usually available within a week’s notice. In some cases your funds may be available within 24 hours. You simply contact us or the money manager to let us know.
Q: I'm retired, so can I take distributions from my account for income?
A: Yes! Many retired clients set up automatic distributions to suit their financial needs.
Q: Can I invest retirement funds?
A: Yes. You can invest IRA’s, trusts, pensions, and other retirement monies.
Q: Are there tax benefits with managed futures?
Click here to download IRS tax form 6781
When investing “cash” in managed futures, you will receive a 1099 for your managed futures gains. These returns are taxed at a 60/40 rate. Meaning, 60% of your returns are taxed as long-term capital gains. (This is a fixed rate of 15%) The remaining 40% of your returns are taxed as short-term capital gains. (These are taxed at your ordinary income tax rate). With the maximum tax bracket of 35% on short-term capital gains and 15% on long-term capital gains, the current maximum blended rate of 60/40 tax treatment is 23%.
When investing retirement funds via a rollover, your current tax structure remain will remain intact and will not change.
Tax Treatment of Futures Contracts: Futures contracts traded on regulated U.S. futures exchanges are covered by Section 1256 of the Internal Revenue Code. There are certain differences in tax policy when comparing futures with equities and fixed income. First, regardless of the holding period of a futures contract, net gains or losses for the year are allocated 60% to long term and 40% to short term capital gain. Meaning, 60% of gains are taxed at a flat 15% rate, the remaining 40% are taxed at your ordinary income tax rate. Second, all unrealized gains or losses at year-end are marked to market and included in the net gain or loss for the year. Third, if an investor has a net loss from futures in the current year he may carry-back the loss for up to three years against prior year futures gains and file an amended return to recapture prior year taxes paid. As an alternative he may either apply the loss to other securities gains or carry it forward to offset future year gains. In addition to gains or losses from transactions, if the account earns interest, the interest income will be subject to normal tax treatment of the interest income.
Q: Who holds my money?
A. When opening an individually managed account, client funds are held at respective clearing firms in each client's name.
Q: Does VAM handle my money?
A. No. We never touch your money. In fact, you never write a check to VAM for anything!
Q: How do I monitor my account?
A. Online and/or statements which can be mailed to you.
Q: What assets can I protect and grow?
A. Virtually all types of accounts. Non-qualified “Cash” and Qualified “Retirement Accounts”.
Q: How am I taxed?
A. We are not tax advisors or accountants. However, there are some favorable tax terms. If you are investing a retirement account then your tax structure does not change. But if you are investing cash, the terms are 60/40 meaning 60% of your gains are taxes as fixed long-term capital gains ay 15% and the remaining 40% is taxes at your personal tax rate.
Q: Can I trade futures myself?
A. Yes. However, it defeats the whole purpose. That’s why we recommend Professionally Managed Futures vs. futures. As a comparison, you could perform open-heart surgery on yourself. But I’m sure you would agree, it would not only be far less risky but would also provide far better results to leave it to a professional heart surgeon.
Q: What will my current financial advisor say?
A. In our opinion, that really depends on whether or not they have your best interest in mind. If they are a basic series 6 or 7 licensed financial planner, that simply means they aren’t licensed or trained to be able to provide you access to all the uncorrelated asset classes necessary to achieve true and proper diversification. However, many times basic financial advisors actually contact us so we can help them properly diversify their clients versus losing them altogether. Basically every situation is different, so we simply recommend having a conversation with us so we can get a feel for your specific relationship with your current financial advisor in order to give you some suggestions on how you may best handle the situation.
Q: Are Commodities and Managed Futures different?
A. Investors often make no differentiation between commodities and professionally managed futures. Commodities are an asset class. Professionally managed futures are an investment vehicle which uses the commodity futures and options markets in an attempt to capitalize on a rise or fall in commodity prices. In professionally managed futures, performance results are more dependent on the skill of the manager, not the investment vehicle. For example, 2008 was one of the worst years on record for not only stocks, but also commodities: commodities fell 46%. However, professionally managed futures were up 14% - 18% according to the Credit Suisse/Tremont Managed Futures Index* and the Barclay CTA Index due to Commodity Trading Advisors (“CTAs”) capitalizing on significant declines in commodity prices.
Q: Are Hedge Funds and Managed Futures different?
A. The differences between managed futures and hedge funds are substantial. Managed futures are 100% transparent. With hedge funds, investors are often unaware of the holdings of the fund. At times their positions are very hard to value and estimate. When liquidated, hedge fund positions can be much lower than their estimated value. On the other hand the holdings of managed futures managers and the corresponding profit/loss of the positions can be viewed in real time every day at their exact value. Additionally, managed futures typically trade in the most liquid markets in the world. Hedge funds often venture into illiquid securities (such as mortgage backed securities or over-the-counter products) which aren’t traded on many exchanges.
Q: How do I open a new account?
A. To open a new account you can either utilize our automated system by Clicking Here or contact Vincent Asset Management to ensure that the strategy is appropriate to your risk tolerance, investment goals, and investment experience. If suitable, your account executive will provide you with the necessary disclosure documents and account applications to establish the account.
Q: How do I transfer an account to Vincent Asset Management?
A. Transferring a self-directed IRA or other retirement account to VAM is quick and easy. In most cases a new account form and account transfer form will be required to facilitate the transfer. Once complete, your VAM account executive will process the transfer on your behalf. Your VAM account executive can assure that you incur little if any down time from the markets during this process.