Introduction to Strategic Portfolio Analysis

The losses experienced by traditional equity and bond portfolios in 2008 highlights the need, for investors, to expand into other asset classes that could have helped them mitigate their losses. 2008 was a year in which, irrespective of geography and industry, global equities behaved as one. Managed futures can provide a natural source of diversification for equity and bond portfolios. This is due to the ability of managed futures programs to participate in movements both to the upside and downside in bull and bear markets in over 100 global futures contracts.

Modern Portfolio Theory

In 1952, Harry Markowitz, an economist at the City University of New York, published “Portfolio Selection”, a paper which revolutionized the way we view and manage investment portfolios. At the time, traditional asset management focused on predicting individual stock price movements using fundamental and technical analysis; investment decisions were made solely on the merits of individual stocks trades.

Unfortunately, this encouraged investors to hold concentrated positions within their portfolios. For example, investors who believed that individual railroad stocks were attractive investments would construct a portfolio consisting solely of these stocks. We now know that we should diversify and not have all of our eggs in one basket.

Markowitz proposed that investors focus on creating portfolios based on the portfolio’s overall risk-reward characteristics rather than compiling a portfolio from securities that individually have attractive risk-reward characteristics. In other words, Markowitz showed that a portfolio is not about picking stocks, but about choosing the right combination of stocks to minimize your risk and increase your potential performance.

His hypothesis and subsequent work were so revolutionary that Professor Markowitz was a joint Nobel Laureate for economics in 1990. His approach is known as the Modern Portfolio Theory (MPT). However, practical applications of the Modern Portfolio Theory had to wait for advances in computer power to become fully available. As a result, it was not till the mid-1990s, that MPT became a mainstream finance topic that is included in every entry-level finance text and course.

Diversification

Taking a closer look at the concept of diversification, the idea is to create a portfolio that includes multiple investments in order to reduce risk. Consider, for example, an investment that consists of only the stock issued by a single company. If that company’s stock suffers a serious downturn, your portfolio will sustain the full brunt of the decline. By splitting your investment between the stocks of two different companies, you reduce the potential risk to your portfolio.

Asset Allocation

The first step in creating a diversified portfolio is to determine the asset allocation mix you will invest managed futures in. There are plenty of studies showing that the asset allocation process is the single most important step in building well diversified portfolios.

Dimensional Fund Advisors studied the returns of 44 institutional pension funds with about $450 billion in assets over various time periods averaging nine years.

  • The study concluded that more than 96 percent of the variation in returns could be attributed to the kinds of assets in the portfolios.
  • Most of the remaining 4 percent was attributable to stock picking and the timing of purchases and sales
  • Therefore, we need to concentrate our efforts on the total portfolio composition and how assets are allocated

Harvard Management Company, the investment arm responsible for investing Harvard University’s endowment, provides a solid example of the importance of a solid asset allocation theme.

Harvard and Yale, among other institutions, have long understood the need to move away from a strict mixture of stocks and bonds. As a result, their asset allocation models now include exposure to commodities thru the purchase of real assets and absolute funds or hedge funds. Regardless of whether you are an aggressive or conservative investor, the use of asset allocation to reduce risk through the selection of a balance of stocks, bonds, and managed futures for your portfolio can help you become better diversified and allow you to participate in markets outside of traditional equity and bonds.

Frequently Asked Questions About Managed Futures

What are the three types of futures?

Index Futures – A subset of financial futures, these are tied to market indices and allow traders to speculate on or hedge against movements in the overall market. Financial Futures – These are based on financial instruments such as stock indices (like the S&P 500), interest rates, or currencies. They’re commonly used by investors to manage risk or gain exposure to financial markets. Commodity Futures – These involve physical goods like oil, gold, wheat, or coffee. Traders use them to hedge against price changes or to speculate on future price movements.

What is the difference between global macro and managed futures?

Global macro strategies invest based on broad economic and political views, using instruments like currencies, interest rates, and equities across global markets. Managed futures strategies typically use systematic, trend-following models to trade futures contracts across asset classes like commodities, currencies, and bonds. While global macro can be discretionary or systematic, managed futures are usually rules-based and quantitative.

How to manage risk trading futures?

Managing risk when trading futures involves several key practices. First, always use stop-loss orders to limit potential losses on each trade. Second, diversify your positions across different assets or contract months to reduce exposure to any single market event. Third, maintain a disciplined risk-reward ratio—typically aiming for at least 2:1—to ensure potential gains outweigh losses. Fourth, stay informed about market-moving news and economic indicators that can impact futures prices. Finally, never risk more than a small percentage of your trading capital on a single trade to preserve long-term viability.

What are the examples of managed futures?

Examples of managed futures include commodity trading advisor (CTA) funds, which use systematic strategies to trade futures across asset classes. Another example is multi-strategy managed futures funds that combine trend-following, mean-reversion, and macroeconomic models. Institutional investors may also use separately managed accounts (SMAs) tailored to specific futures strategies.