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How
Managed Futures Can Improve Investment Returns
by Marlee-Jo
Jacobson
Why Are Managed Futures
Needed?
If you are looking to build
capital there is no perfect investment. Each component of the
typical portfolio carries clearly defined limitations. For
example Growth Stocks only perform well in a bull market. Bonds
have the opportunity for loss of principal if the asset is sold
(interest rate risk). Real Estate is illiquid therefore cash is
not easily accessible. Energy Partnerships and Stocks are subject
to the price risk of underlying oil prices. Hedge funds may be
comprised of only illiquid investments. Each investment has its
own set of economic circumstances that require it to perform. If
those circumstances are not present it affects your portfolio as
a whole.
Substantial financial rewards
may be realized by accepting that managed futures are also
imperfect but bring their own positive advantages complimenting
your existing investments. The synergy of a well-balanced
portfolio reduces risk to the entire structure. Unique benefits
of managed futures easily offset the risks of traditional
investments. Total liquidity and skilled use of leverage are
considered the greatest benefit of any managed futures
investment. History teaches us that performance and price
movement of futures/options greatly differ from traditional
investments during various market cycles and do not track well.
Futures are non- correlated to any other investment sector making
it a perfect strategy for offsetting the inherent risk associated
with various market and economic conditions. The question
investors must ask when they survey available capital management
vehicles is; How can I utilize the inherent weaknesses of each
market sector to my advantage?
Using only 20% or less of your
total portfolio automatically considers and reduces the above
average risk of using leveraged investments. To fully understand
market movements in managed futures, it is necessary to step
outside conventional thought and reach towards something more
direct, adaptable, liquid and potentially lucrative. As compared
to more traditional investments, which are usually held for one
year or longer, high leverage makes futures (a derivative) a tool
that offers a time value use of capital totally unique to
investments. Positions within your portfolio may be held anywhere
from minutes and hours to days and weeks. A condensed time frame
enables investors to capitalize on the markets volatility and
shorter-term trends to seek long-term capital appreciation.
Ability to integrate an investment with a time value use of
capital so distinctive gives you opportunity to incorporate a
"Yield Curve Effect" into your entire portfolio.
Year
|
100TI
|
80-20TISI
|
100HFOF
|
80-20HFSI
|
100SI
|
1998
|
19.94%
|
48.66%
|
0.70%
|
31.16%
|
158.00%
|
1999
|
35.42%
|
38.24%
|
34.51%
|
38.22%
|
43.56%
|
2000
|
-11.39%
|
5.18%
|
17.40%
|
24.49%
|
34.40%
|
2001
|
1.76%
|
1.00%
|
3.51%
|
1.89%
|
0.03%
|
2002
|
-19.15%
|
-7.18%
|
5.86%
|
6.36%
|
7.02%
|
2003
|
-20.31%
|
10.42%
|
13.23%
|
8.05%
|
1.54%
|
2004
|
-
|
-
|
-
|
-
|
-
|
Total Return
|
6.27%
|
96.32%
|
75.21%
|
110.17%
|
244.55%
|
The table represents an equal
weighted index the S&P 500, Lehman Bond Index, NASDAQ and
Russell 2000. The Hedge Fund of Fund is from Hedge Funds.net web
site. Sanctity Index is an equally weighted value of three
trading advisors. 20% was taken from the Traditional Index and
reallocated to the Sanctity Index. Then 20% from Hedge Funds
reallocated to Sanctity. Traditional Indexes are before any cost
the Sanctity Index is after commissions and advisor fees.
What
are the Benefits?
It has been proven that managed
futures can offset the risk of a traditional investment portfolio
when that portfolio is invested in other risky assets such as
stocks. Futures and Options have market movements and use capital
differently than any other investment. Although each institution
differs, many institutions allocate 2 or 3% of their pension
funds into managed futures/options/currencies etc. They seek
returns in the low teens and then integrate performance into
their entire financial structure. When managed futures are in a
negative performance mode, other aspects of the portfolio will be
up and over the long term each component of the composite offsets
weaknesses of its counterparts.
Retail investors or private
retirement funds usually allocate higher percentages because
their investment policies differ. Each market sector looks to
managed futures for different purposes and benefits. Managed
futures can be a superb addition to any retirement portfolio
because there are no annual tax consequences. Reinvesting returns
year after year has a dynamic effect on asset growth.
What are the Risks and How Should they
be managed?
Maximum risk in partnerships is
limited to the investor's total capital contribution, plus all
distributions paid back. Although total investment loss is highly
unlikely it must still be disclosed that total investment loss is
possible. We believe that if investors understand the extreme
downside they can choose and live with the investment through any
market condition with no fear of loss.
We teach people to answer
several questions before investing in any high leveraged
investment.
1. Where should the capital
come from?
2. How much and for how long
should be allocated?
3. What considerations should
be made to determine capital committed? For example, age, time,
temperament, and investment strategy etc.
4. How should I evaluate
probabilities of the composite?
5. How should the allocation TO
ANY alternative be allocated WITHIN the investment?
6. Opportunity loss after the
money is re allocated.****
7. Risk analysis and time to
rebuild the portfolio back to its current value net of the
allocation.
8. Consider other possible
alternatives (risk/reward, liquidity, time value etc).
9. How to maximize, monitor
& balance the alternative strategy.
10. Value and risk of the
alternative investment when integrated into the
composite.
11. Prudent evaluation of past
performance*****
12. Define parameters for
specific action under variable market scenarios.
13. Look at your beliefs and
intentions relative to your strategy.
Let's briefly review
descriptions for each question listed above.
1. Review all of your
investments and look for current allocations that are likely to
produce the lowest return with the highest risk. That is the
money that can probably be considered for reallocation. (The
composite investment structure needs to be evaluated). Only use
capital that you can comfortably live without. Capital taken from
the stock market is also a good choice because there is probably
more risk that what can be developed by integrating managed
futures.
2. Start with a 12 to 18 month
commitment with the least amount of capital needed. The
investment should earn your trust in the first year to 18 months.
It will also take that amount of time to get comfortable with how
high leveraged investments work.
3. The closer you are to
retirement age should equal the least amount of capital committed
to ANY investment using high leverage. After considering your
emotional nature, the more time you have could be used as a
reason to commit more capital.
4. Sanctity correlates
composite strategies and degrees of leverage. Investors need to
determine their personal rational expectation relative to the
risk they are willing to assume. The evaluation process is
detailed and taught in our investment guides. http://www.alwaysafemoneymetrics.com/guides/guides.htm
5. Allocations within the
investment are determined by each investors risk tolerance and
expectation. Sanctity uses SafeMoneyMetrics ™ to allocate
assets among advisors and monitor all risk daily.
SafeMoneyMetrics™ maximizes potential return with the least
amount of capital at risk and account volatility.
6. It's important to look at
where the money is coming from and what will be the opportunity
loss because that money is used elsewhere.
7. Assume all capital committed
to the new investment is lost. Calculate how long it will take to
rebuild your portfolio back to its original value without
incurring any more risk. This is a magnificent way to emotionally
and financial manage the maximum downside of managed futures
investments. From that point everything can only be a pleasant
surprise!
8. Carefully evaluate other
alternatives to be sure you are optimizing potential return
relative to probable risk. Also consider how managed futures can
comfortably integrate with your composite portfolio.
9. - 12. The General Partner
associated with Sanctity offer investors a due diligence
questionnaire that details exactly how each advisor manages
capital and what to expect. This risk management strategy defines
how advisors act under specific market conditions. The intention
is to eliminate negative surprises from the investment and give
each investor substance they can refer to during difficult market
circumstances.
13. Take time to evaluate your
beliefs. Constructive positive beliefs will always lead to
success. It's how the Universe works.
We offer complimentary mini
courses and monthly articles on managed futures.
About the Author:
Marlee-Jo Jacobson is founder of Sanctity Capital Management and SafeMoneyMetrics . Investment, risk management, business development and consulting
services incorporating are offered to private investors, national and international
banks, institutions and financial service professionals. Contact: 20 East 9th Street
Suite 15A, NYC, NY 10003 212-777-3862 mj@sanctity.com