Generally speaking, because Managed Futures have little correlation to stock and bond markets, it is quite difficult to make a comparison. It may be common practice for investors to dissect the individual elements of their portfolio and expect them to compete with one another over every time period.
However, effective and prudent asset allocation would suggest that:
- Managed futures cannot be looked at in isolation from the rest of the portfolio, nor should they be examined in relation to the stock market.
- It is very important to ensure investors have a balanced approach to investing, to understand the rationale behind allocating portions of assets to different investment classes, styles or instruments, and that they always keep their long-term goals in mind.
- Different instruments within their portfolio should complement each other, not compete with each other. It is important to remember that different investments derive profitability from a variety of economic and market scenarios, and that investments will not all perform at the same time. Otherwise, all investments would make money together and all would lose money together.
According to the Tax Act of 1981, short-term profits (held for less than one year) in commodities are treated as 60% long term and 40% short term. On the other hand, short-term trading profits in stocks are treated as 100% short term. For individual investors in higher tax brackets, this tax treatment can mean saving as much as 30% on taxes on short-term gains on commodities versus stocks. Investors should discuss the taxation elements relating to their investment with an independent qualified Tax advisor.
During times of market volatility or declining stock and bond markets, managed futures may be an important part of your portfolio. In the event of a major, sustained downturn of the equity or fixed income markets, Managed Futures may potentially provide some protection for a client´s overall portfolio. Increasingly sophisticated institutional investors such as pension funds, endowments, foundations, and family offices are allocating larger portions of their portfolios away from equity and fixed income into alternative investments. Managed futures are a sub-class of alternative investments.
There are several companies that offer investors access to well-organized databases of Managed futures programs, where you can rank performance, look at best and worst performances by a money manager and compare them to others. One company offering a database of over 120 Managed Investments providers is IBTRADE (www.ibtrade.com). There are several company offering similar type databases, however, the IBTRADE CTA database is free.