Managed Futures vs. Other Alternatives: Key Differences Explained

Imagine the world of investing as a diverse marketplace. Traditional investments like stocks and bonds are the well-trodden main streets, familiar and generally understood. Alternative investments, on the other hand, are like the specialized, less-traveled side streets, offering different opportunities and often operating in unique ways. Within these alternative side streets, you’ll find various shops, each with its own specialty. Two such shops you might encounter are “Managed Futures” and “Other Alternative Strategies,” and understanding their differences is crucial for navigating this marketplace effectively.

Managed futures are a specific type of alternative investment that uses professional money managers, known as Commodity Trading Advisors (CTAs), to actively trade futures and forward contracts across a wide range of global markets. Think of futures contracts as agreements to buy or sell something at a future date for a set price. These “somethings” aren’t just commodities like oil and gold; they can also include financial instruments such as stock indices, currencies, and interest rates. Managed futures strategies are often systematic and trend-following. They use sophisticated computer models and algorithms to identify and capitalize on price trends in these diverse markets, aiming to profit whether markets are going up or down. In essence, they are trying to ride the waves of market movements, regardless of direction.

Now, let’s consider “other alternative strategies.” This is a much broader category, encompassing a wide array of investment approaches beyond traditional stocks and bonds. Think of it as the rest of the alternative investment marketplace beyond the managed futures shop. This could include hedge funds employing various strategies (like long-short equity, event-driven, or credit strategies), private equity investments in companies not publicly listed, real estate, infrastructure projects, and even collectibles like art or wine. Each of these strategies operates differently and targets different types of returns. For example, a hedge fund might focus on exploiting market inefficiencies through complex trading strategies, while private equity aims to improve the operational performance of acquired companies over several years.

The key differences between managed futures and these other alternative strategies boil down to several factors:

• Underlying Assets and Markets: Managed futures primarily focus on trading futures and forward contracts, which are derivatives tied to commodities, currencies, indices, and interest rates. Other alternative strategies have a much wider scope. Hedge funds can invest across virtually any asset class, including stocks, bonds, derivatives, and even real estate. Private equity invests directly in companies. Real estate invests in physical properties. This narrower focus of managed futures on futures markets is a defining characteristic.

• Trading Style and Strategy: Managed futures are often characterized by systematic, trend-following approaches. They rely heavily on quantitative models to detect trends and execute trades. Other alternative strategies are more diverse in their approaches. Hedge funds, for example, can employ discretionary strategies based on manager skill and judgment, fundamental analysis, or event-driven approaches. Private equity is fundamentally a long-term, value-creation strategy focused on operational improvements and strategic changes within portfolio companies.

• Liquidity and Transparency: Compared to some other alternatives, managed futures generally offer higher liquidity and transparency. Futures markets are typically liquid, meaning it’s relatively easy to enter and exit positions. Many managed futures funds also provide regular reporting on their positions and performance. In contrast, private equity and real estate are inherently illiquid – you can’t easily sell your investment quickly. Hedge fund transparency can vary widely depending on the fund and its strategy.

• Correlation to Traditional Assets: Managed futures are often touted for their potential to provide diversification benefits due to their low correlation to traditional stock and bond markets. This is because trends in futures markets are often driven by different factors than stock market performance. While some other alternative strategies also aim for low correlation, their correlation profile can be more variable and dependent on the specific strategy and market conditions. For example, some hedge fund strategies might be closely correlated to equity markets.

• Regulation and Access: Managed futures are generally regulated under commodity futures regulations, which are distinct from securities regulations governing many other alternative investments. Access to managed futures funds is often more readily available to a wider range of investors compared to some hedge funds or private equity, which may be restricted to accredited or institutional investors due to their complexity and regulatory frameworks.

In conclusion, while both managed futures and other alternative strategies offer diversification beyond traditional investments, they operate very differently. Managed futures are specialized in trading futures markets, often using systematic trend-following strategies, and typically offer greater liquidity and transparency. Other alternative strategies are a much broader church, encompassing a wide range of asset classes and approaches, each with its own risk and return characteristics. Understanding these key differences is essential for investors looking to navigate the alternative investment landscape and determine which strategies might be appropriate for their portfolio.