By Lawrence G. McDonald
larry@thepangeafund.com

The 21st century, and the recent implosion of the world’s economy has brought the emergence of a new asset class called managed futures.

This new breed of asset has outperformed the stock market by a staggering margin in recent years, even through the economic storm that gripped the markets after Lehman Brothers went bankrupt.

A managed futures account is like a mutual fund, except your money is invested in futures contracts instead of stocks and bonds. The managed futures fund can own contracts to own stocks, or commodities or government bonds and currencies. The fund can go long or short, that’s for and against the stock market, the bond market, commodities or currencies (without the compliance to the up tick rule.)

Unlike most mutual funds, which are restricted to investing in one or two assets, managed futures are extremely flexible, and can change asset allocation on a daily or weekly basis, if the portfolio manager
chooses. Imagine having your own personal expert with many, many years of experience choosing when to invest in the four leading asset classes (stocks, bonds, commodities, or currencies.) This is the
essence of investing in a professionally managed futures fund. Having every asset at your disposal.

A closer look at managed futures funds is worth your time, because they have the ability to earn money in any economic climate. In recent years, these little-known investment shops have undergone a surge in
popularity, as savvy investors have seen the advantage of their high-liquidity, minimal volatility and crystal clear transparency.

But what exactly are these managed futures funds, and how do they work?
 They operate in a very simple way. The money is professionally managed in the futures market, and traded on government regulated
exchanges. For example, the New York Mercantile Exchange (NYMEX) or the Chicago Mercantile Exchange (CME) are some of the most liquid markets around. Professional money managers known as Commodity Trading Advisors (CTA) look after managed futures accounts, and decide on
their positions based on expected profit potential. A managed futures account typically invests in commodities, currencies, equity indices, and fixed income treasury futures.

8 Reasons to own Managed Futures

1) Daily Liquidity.

Your money is never trapped. The major advantage to investing in managed futures this way is the daily liquidity that some funds provide. Manhattan based Pangea Capital Management LLC, gives their
clients daily liquidity. You can have the portfolio manager unwind your account and give you the cash in 24 hours.

You can pull your money out on your timetable, which is a massive advantage over most hedge funds and many mutual funds in today’s volatile markets. It could take a month to unwind a billion dollar
leveraged loan fund or a private equity fund, but even a $1 billion managed futures account can be liquidated in a day!

So many professionally managed accounts these days have come to represent the roach motel. Investors check in but it’s difficult to check out. Private equity funds, leveraged loan funds, credit
derivative funds, mortgage backed securities funds, municipal bond funds and even some long / short equity hedge funds have trapped thousands of investors.

Beware of high “gates.” Countless money-losing hedge funds curtailed investor withdrawals at the beginning of 2009 as redemption requests piled up. But “raising the gates,” as it’s known in the industry, can cost investors serious money. In a normal hedge fund or private equity fund, fire-sales can drive prices down wildly because the market isn’t as deep as the futures market. That market is deeper than a bottomless pit, because the position doesn’t have to be sold to anyone. This makes the futures exchanges the deepest and most liquid in the world.

2) Profit in any political or economic environment.

The beauty of managed futures is that portfolio managers have the flexibility to position assets for profit, independent of the direction of the economy. They can take advantage of price trends, by purchasing futures positions in anticipation of a rising market, or by selling futures positions if they anticipate a falling market. During inflationary trends, futures provide an opportunity to profit by
buying commodity futures or selling dollar futures.

This potential to profit from a variety of economic environments makes an investment in managed futures particularly attractive to some investors.

There are dozens of developed countries worldwide. Some economies are weaker than others at any given point in time. If one currency is strong, another will be weak. If one commodity tanks, another will
rise. The whole push-and-pull nature always gives the beady-eyed fund manager an opportunity to score base hits. Inning after inning.

Yet, more than ever, politics is on the minds of most investors today. The United States is clearly making a sharp left turn, and some investors are running for cover. The House, Senate and the Obama
administration may pass legislation which may be harmful to certain industries and to stocks as a whole. With your money in managed futures you can sleep at night and not care about any political
implications.

3) The futures market is not correlated to the stock market.

This is perhaps the most attractive quality. With the current stock market up some 60% from the lows of the year it makes more sense than ever to allocate investable funds to managed futures. During a stock
market crash, the risk reward from a long perspective is terrible. The lower tide brings down all ships. Even in a relatively flat zone with low volatility, equities can bring in small returns, if any. But
futures pull against each other. It is almost an independent force, a market unto itself. Again, with the four main asset classes at their disposal, (commodities, government bonds, stocks and currencies) fund
managers can constantly trade something that is rising in price. A bull always lurks in the futures market.

4) Technical’s, Not Fundamentals, Dictate Returns.

A portfolio manager in a managed futures fund is like a soldier of fortune, quite literally. He looks for established trends, and this trend becomes his guiding light. He doesn’t have to worry about
company specific fraud like an Enron or a Lehman Brothers. He relies on quantitative models and his market experience. That’s all. Many mutual funds and hedge funds are exposed to company specific risks.

All the research in the world can’t uncover a well constructed fraud scheme. Just look at Bill Miller, the highly respected manager of the Legg Mason Value Trust, the only mutual fund to outperform the S&P 500 for 15 consecutive years—plunged 55 percent in 2008 after investing in a graveyard of financials, all with questionable accounting practices, including Bear Stearns, AIG, Countrywide and Freddie Mac. This type of investment disaster does not effect the futures markets.

5) No counter-party or credit risk

Numerous hedge funds got caught with billions of dollars trapped at Lehman Brothers when they did the unthinkable and filed bankruptcy. Over $35 billion has been trapped since September 2008. It will be
years before they see that money again. Client accounts at Lehman Brothers were only protected up to $500,000 under SIPC insurance. AIG almost brought down Goldman Sachs. Our financial world today is more interconnected than ever and counterparty risks never greater.

Remember, a managed futures portfolio manager (CTA) buys and sells futures contracts on the NYMEX or CME. He doesn’t own stocks, bonds or mortgaged backed securities that have to be stored by a prime
broker. There is little, if any, counterparty risk in owning managed futures. I’ve never heard of a stock or commodity exchange going out of business, have you?

6) Opportunity to balance portfolio volatility risk.

This balancing of the portfolio is possible because of the low to slightly negative correlation of managed futures with equities and bonds. A major tenet of Modern Portfolio Theory, developed by the Nobel Prize economist Dr. Harry M. Markowitz, is that more efficient investment portfolios can be created by diversifying among asset categories with low to negative correlations. In other words, adding a managed futures fund to your portfolio of funds and investments will most likely lower volatility. In 2008, while stocks slumped 37%, managed futures funds gained an average of 10.3%, according to the
Credit Suisse/Tremont Index.

7) Participation in global market investments.

Managed futures accounts can participate in over 50 different markets worldwide, including agricultural and tropical products, stock indices, precious and nonferrous metals, currencies, and energy products. Portfolio managers have many opportunities for profit potential and risk reduction among a broad array of non-correlated markets.

Daily Transparency

Ever since news of Bernie Madoff hit the global newswires, investors have been more cautious and diligent in choosing asset managers. More questions than ever are being asked to money managers at hedge funds and mutual funds. But with managed futures funds, clients are offered daily transparency and daily liquidity, with some funds posting their net asset values on Bloomberg, making sure investors are never in the dark, and never locked in behind the high gates of Wall Street.

Investing in managed futures is becoming the future of investing.