Chance D.N., Pamplin R.B. Managed Futures and Their Role in Investment Portfolios

Research Foundation of CFA Institute – 1994, 88 pages
ISBN: 9780943205786, 0943205786Although futures contracts have existed for as long as markets have existed, only recently have futures gained acceptance as legitimate and viable invest­ ments-and only by some professional investment managers. In this mono­ graph, Don Chance convincingly argues that futures offer an attractive outlet for investments and should no longer be regarded as a kind of second-class asset group in comparison with stocks and bonds. Rather, when combined with other asset groups, futures offer a means to enhance a portfolio's risk and return attributes. Professor Chance further contends that futures managers should be regarded in a manner similar to their counterparts in stock and bond investment management.
Many managers remain skeptical, however, about the value and appropri­ ateness of including futures in institutional portfolios. They claim that these securities are too speculative and complex. Furthermore, the skeptics believe, the futures markets are not sufficiently organized to accommodate sizable institutional trading activity.
Nevertheless, the increased acceptability of futures and futures managers has led to the development of a managed futures industry. The growing importance of this industry roughly coincides with the evolution of Modem Portfolio Theory. According to MPT, the overall market consists of all varie­ ties of assets-not merely the traditional stocks, bonds, and money market equivalents. When properly combined, the various asset classes produce a portfolio with a risk-return profile that is superior to a portfolio confined to fewer asset groups. Thus, managed futures, as a distinct asset class, add diversification benefits to a portfolio.
Because of the benefits futures offer a portfolio, the infant managed futures industry is likely to be embraced by more and more investment managers. literature about this vital topic is sparse, however. Thus, Chance's mono­ graph is extremely important to practicing investment managers. Chance contributes a comprehensive overview of managed futures as an investment vehicle and, as a result, provides a valuable guide to the manager who is contemplating the inclusion of futures in a portfolio.
Of paramount importance to the understanding of any new topic is the author's ability to transmit a comprehensive and understandable treatise on the subject. In that respect, Professor Chance's coherent and convincing communication offers a valuable education to any open-minded investment professional. After beginning with a discussion of the evolution of the man­ aged futures industry, the author proceeds to delve into the many reasons for including managed futures in a portfolio. Of major importance is that futures provide the only vehicle through which certain assets can be reasonably accessed. Moreover, in an MPT context, many of these assets have low correlations with other, more traditional assets. Futures may also setve as an effective inflation hedge, and they offer unique short-selling and leverage possibilities.
In his advocacy of this asset class, Chance maintains an unbiased perspec­ tive in his presentation by also addressing the drawbacks of managed futures. Trading costs are high, and the overall market capacity remains subject to doubt. The prices of the assets can fluctuate wildly. Even the performance of the professional managers is subject to fairly high volatility.Furthermore, this market's negative image causes executives and trustees to shy away from the use of managed futures. Chance concludes, however, that the benefits of managed futures outweigh the disadvantages.
Although Professor Chance provides an outstanding discussion of the evolution and uses of the managed futures market, his most valuable contri­ bution may be his tutorial about how actually to establish a managed futures program. He provides an eloquent explanation of the steps to follow in setting up such a program, shows how to evaluate the performance of managed futures, and delves into tl)e key legal, regulatory, accounting, and tax consid­ erations attending these assets.
Managed futures seem destined to gain further acceptance by professional investment managers. In this monograph, Don Chance presents a complete tutorial on the subject. From it, interested managers can gain an appreciation of these assets and learn how best to incorporate them in existing portfolios. The Research Foundation of the Institute of Chartered Financial Analysts is pleased to have sponsored this timely and needed tutorial.ForewordThe Managed Futures Industry
Advantages and Disadvantages of Managed Futures
The Performance of Managed Futures
Evaluating the Performance of a Managed Futures Program
Legal. Regulatory. Accounting. And Tax Considerations in Managed Futures
Setting Up a Managed Futures Program
Sumary
Appendix A . Measures of Passive and Managed Futures Performance
Appendix B . Sources of Information on Managed Futures
References and Bibliography on Managed Futures