Managed Futures 'Will Outperform Stocks Over Long-Term'

by Phillip Morton, Investors Offshore.com

26 April 2005

Despite a recent dip in returns, managed futures funds are likely to outperform stocks on a long term basis and should make up a significant proportion of an investor's overall portfolio, according to one industry expert.

"People are saying managed futures' ability to make money has gone," observed Ernest Jaffarian, the founder, president and chief executive officer of Efficient Capital Management, LLC and veteran of over 20 years within the alternative investment industry in the areas of trading, portfolio construction, and risk management.

"But over the past 25 years, managed futures have made more money ... It takes patience. You won't get immediate gratification ... CTAs have a better risk profile," he added in a speech to a London conference on managed futures organised by IQPC.

Commonly referred to in the investment industry as commodity trading advisers (CTAs), these funds bet on the likely direction of currency, bond, equity and commodity markets through the use of futures contracts. Trades are initiated on buy and sell signals generated by computer models, based on technical analysis of historical price movements and other indicators.

CTA funds have not had a good start to the year. Figures from the hedge fund advisors Van have shown that futures funds lost 3% in the first quarter.

However, According to the Center for International Securities and Derivatives Markets (CISDM), the benchmark S&P 500 index returned an annual average of 10.64% between 1980 and 2005, compared to an annual average return of 12.17% from managed futures.

In the same period, figures from hedge fund advisors The Barclay Group show that CTAs had drawn in $120 billion in assets by 2004, from effectively zero in 1980.

Jaffarian believes that managed futures should constitute at least 10% of a broadly diversified investment portfolio.

However, he was keen to emphasise the distinction between managed futures, which trade on margin and keep large reserves of cash, and hedge funds, which can borrow heavily to fund their investment activities, incurring interest payments at the same time.

"Hedge funds need capital," Jaffarian said. "Don't throw them (managed futures) into the hedge fund space."

Efficient presently allocates more than US$600 million in tradable assets for a variety of global private bank, insurance company, funds of funds and private investor clients.

It seeks and invests with more than 20 quantitative macro, currency, managed futures, and relative value managers from five countries and three continents, delivering broad diversification in over 120 markets spanning currencies, interest rates, stock indices, energy, base and precious metals and commodities.

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