How to Select Managed Futures Funds
The same principles apply to selecting a managed futures fund that apply to selecting any other type of mutual fund. Namely, an expectation that the fund will meet your investment objectives, an understanding of the general strategy of the fund, and an awareness that past performance is no guarantee of future results. Investing in futures is risky; some of that risk can be mitigated by investing in a managed futures fund. In the same way a stock mutual fund is professionally managed and diversified, a managed futures fund offers professional money management and diversification in the commodities markets.
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Instructions
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Decide if futures are right for you. Futures are not an appropriate investment for everyone. Investing in futures is pure speculation, unless you are a bona fide hedger (and bona fide hedgers comprise less than two percent of the overall futures market). Futures carry extraordinary amounts of leverage relative to stocks or stock options. That leverage can provide excellent returns, but it can also create devastating losses. You need to decide before investing whether you can stand to lose everything for a chance at outsized gains.
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Find a commodities trading adviser (CTA) you are comfortable with. Managed futures funds are managed by CTAs. There is an old saying that you should bet on the jockey and not the horse, and it certainly applies to managed futures funds. Commodities markets literally change with the weather, so it is important to invest with a CTA you believe in. Several free services rank CTAs by the returns they achieve, and many services also provide information on the CTAs trading style and background.
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Study the disclosure document. It is important to read the disclosure document from cover to cover, as it will highlight the strategy of the fund, the risks involved, and the fee structure. Pay close attention to the fee structure because this will have a direct effect on the fund's annual return (or it will exacerbate the annual loss, as the case may be). Some funds charge an up-front commission of up to five percent just to buy into them. On top of front-end loads, managed futures funds expense ratios can be quite high over the course of the year as well. For example, if you pay a five percent load to enter the fund and the fund has a three percent expense ratio, the fund has to earn eight percent in the first year for you to break even.
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Check with the National Futures Association (NFA). The NFA maintains a database of every registered CTA and commodities pool operator (CPO). Be sure to check the database to make sure there is no past or pending disciplinary action against your chosen fund manager.
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