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Managed Futures: Portfolio Diversification Opportunities

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Managed Futures: Portfolio Diversification Opportunities Managed Futures: Portfolio Diversification Opportunities Potential for enhanced returns and lowered overall volatility. RISK DISCLOSURE STATEMENT TRADING FUTURES AND OPTIONS INVOLVES SUBSTANTIAL RISK OF LOSS AND IS NOT SUITABLE FOR ALL INVESTORS. THERE ARE NO GUARANTEES OF PROFIT NO MATTER WHO IS MANAGING YOUR MONEY. PAST PERFORMANCE IS NOT NECESSARILY INDICATIVE OF FUTURE RESULTS. THE RISK OF LOSS IN TRADING COMMODITY INTERESTS CAN BE SUBSTANTIAL. YOU SHOULD THEREFORE CAREFULLY CONSIDER WHETHER SUCH TRADING IS SUITABLE FOR YOU IN LIGHT OF YOUR FINANCIAL CONDITION. IN CONSIDERING WHETHER TO TRADE OR TO AUTHORIZE SOMEONE ELSE TO TRADE FOR YOU, YOU SHOULD BE AWARE OF THE FOLLOWING: IF YOU PURCHASE A COMMODITY OPTION YOU MAY SUSTAIN A TOTAL LOSS OF THE PREMIUM AND OF ALL TRANSACTION COSTS. IF YOU PURCHASE OR SELL A COMMODITY FUTURES CONTRACT OR SELL A COMMODITY OPTION YOU MAY SUSTAIN A TOTAL LOSS OF THE INITIAL MARGIN FUNDS OR SECURITY DEPOSIT AND ANY ADDITIONAL FUNDS THAT YOU DEPOSIT WITH YOUR BROKER TO ESTABLISH OR MAINTAIN YOUR POSITION. IF THE MARKET MOVES AGAINST YOUR POSITION, YOU MAY BE CALLED UPON BY YOUR BROKER TO DEPOSIT A SUBSTANTIAL AMOUNT OF ADDITIONAL MARGIN FUNDS, ON SHORT NOTICE, IN ORDER TO MAINTAIN YOUR POSITION. IF YOU DO NOT PROVIDE THE REQUESTED FUNDS WITHIN THE PRESCRIBED TIME, YOUR POSITION MAY BE LIQUIDATED AT A LOSS, AND YOU WILL BE LIABLE FOR ANY RESULTING DEFICIT IN YOUR ACCOUNT. UNDER CERTAIN MARKET CONDITIONS, YOU MAY FIND IT DIFFICULT OR IMPOSSIBLE TO LIQUIDATE A POSITION. THIS CAN OCCUR, FOR EXAMPLE, WHEN THE MARKET MAKES A ‘‘LIMIT MOVE.’’ THE PLACEMENT OF CONTINGENT ORDERS BY YOU OR YOUR TRADING ADVISOR, SUCH AS A ‘‘STOP-LOSS’’ OR ‘‘STOP-LIMIT’’ ORDER, WILL NOT NECESSARILY LIMIT YOUR LOSSES TO THE INTENDED AMOUNTS, SINCE MARKET CONDITIONS MAY MAKE IT IMPOSSIBLE TO EXECUTE SUCH ORDERS. A ‘‘SPREAD’’ POSITION MAY NOT BE LESS RISKY THAN A SIMPLE ‘‘LONG’’ OR ‘‘SHORT’’ POSITION. THE HIGH DEGREE OF LEVERAGE THAT IS OFTEN OBTAINABLE IN COMMODITY INTEREST TRADING CAN WORK AGAINST YOU AS WELL AS FOR YOU. THE USE OF LEVERAGE CAN LEAD TO LARGE LOSSES AS WELL AS GAINS. IN SOME CASES, MANAGED COMMODITY ACCOUNTS ARE SUBJECT TO SUBSTANTIAL CHARGES FOR MANAGEMENT AND ADVISORY FEES. IT MAY BE NECESSARY FOR THOSE ACCOUNTS THAT ARE SUBJECT TO THESE CHARGES TO MAKE SUBSTANTIAL TRADING PROFITS TO AVOID DEPLETION OR EXHAUSTION OF THEIR ASSETS. THE CTA DISCLOSURE DOCUMENT CONTAINS A COMPLETE DESCRIPTION OF THE PRINCIPAL RISK FACTORS AND EACH FEE TO BE CHARGED TO YOUR ACCOUNT BY THE COMMODITY TRADING ADVISOR (“CTA”). A COMPLETE DISCUSSION OF FEES AND CHARGES ARE REPORTED IN THE CTA's DISCLOSURE DOCUMENT. SPECIFICALLY, ONE SHOULD RECOGNIZE THAT AN INTRODUCING BROKER MAY CHARGE A FRONT-END START UP FEE OF UP TO 3% OF THE INITIAL CONTRIBUTION. PLEASE NOTE THAT THIS CHARGE IS NOT REFLECTED IN THE PERFORMANCE OF THE COMMODITY TRADING ADVISOR AND COULD HAVE A SIGNIFICANT IMPACT ON THE CUSTOMERS ABILITY TO ACHIEVE SIMILAR RETURNS. MANAGED FUTURES MAY NOT NECESSARILY BE PROFITABLE UNDER ALL MARKET CONDITIONS AND ALSO MAY NOT NECESSARILY REDUCE VOLATILITY. THIS MATTER IS INTENDED AS A SOLICITATION. THIS MATERIAL MAY MENTION SERVICES WHICH RANK THE PERFORMANCE OF COMMODITY TRADING ADVISORS. PLEASE NOTE THAT THE RANKINGS APPLY ONLY TO THOSE CTAs WHO SUBMIT THEIR TRADING RESULTS. THE RANKINGS IN NO WAY PURPORT TO BE REPRESENTATIVE OF THE ENTIRE UNIVERSE OF COMMODITY TRADING ADVISORS. THE MATERIAL IN NO WAY IMPLIES THAT THESE RESULTS ARE OFFICIALLY SANCTIONED RESULTS OF THE COMMODITY INDUSTRY. BE ADVISED THAT AN INDIVIDUAL CANNOT INVEST IN THE INDEX ITSELF AND THE ACTUAL RATES OF RETURN FOR AN INDIVIDUAL PROGRAM MAY SIGNIFICANTLY DIFFER AND BE MORE VOLATILE THAN THE INDEX. As the world’s leading and most diverse derivatives marketplace, CME Group is where the world comes to manage risk. CME Group exchanges offer the widest range of global benchmark products across all major asset classes, including futures and options based on interest rates, equity indexes, foreign exchange, energy, agricultural commodities, metals, weather and real estate. CME Group brings buyers and sellers together through its CME Globex® electronic trading platform and its trading facilities in New York and Chicago. CME Group also operates CME Clearing, one of the largest central counterparty clearing services in the world, which provides clearing and settlement services for exchange-traded contracts, as well as for over-the- counter derivatives transactions through CME ClearPort®. These products and services ensure that businesses everywhere can substantially mitigate counterparty credit risk in both listed and over-the-counter derivatives markets. Futures trading is not suitable for all investors, and involves the risk of loss. Futures are a leveraged investment, and because only a percentage of a contract’s value is required to trade, it is possible to lose more than the amount of money deposited for a futures position. Therefore, traders should only use funds that they can afford to lose without affecting their lifestyles. And only a portion of those funds should be devoted to any one trade because they cannot expect to profit on every trade. All orders are entirely at your risk, and it will be your responsibility to monitor these orders. There are limitations to the protection given by stop loss orders, therefore we give no assurance that limit or stop loss orders will be executed, even if the limit price is met, in full or at all. CME Group Managed Futures: Portfolio Diversification Opportunities WHAT ARE MANAGED FUTURES? The term managed futures describes a diverse INVESTMENT UNIVERSE subset of active hedge fund strategies that trade liquid, transparent, centrally-cleared exchange-traded products, and deep interbank TRADITIONAL ASSET CLASSES ALTERNATIVE INVESTMENTS foreign exchange markets. Managers in this sector are called commodity trading advisors Cash Hedge Funds Bonds Managed Futures (CTAs) and their strategies are largely Equities Private Equity focused on financial futures markets with Real Estate Credit Derivatives additional allocations to energy, metals and agricultural markets. Managed futures are an alternative investment in their own right, separate from traditional investments such as stocks and bonds. MANAGED FUTURES GROWTH IN ASSETS UNDER MANAGEMENT Since 2008, assets under management for the managed futures industry have grown 55% For the purposes of this booklet, managed futures do not include Managed futures have been used successfully by investment management professionals for futures accounts where futures are used in risk-management programs or hedge funds. Those funds may be used to dynamically more than 30 years. Institutional investors looking to maximize portfolio exposure continue to adjust the duration of a bond portfolio or to hedge the currency exposure of a foreign equity portfolio. increase their use of managed futures as an integral component of a well-diversified portfolio. With the ability to go both long and short, managed futures are highly flexible financial instruments with the potential to profit from rising and falling markets. Moreover, managed futures funds have limited correlation to traditional asset classes, enabling them to provide the opportunity for enhanced returns and lower overall volatility. Growth over the past decade in managed futures has been substantial. In 2002, it was estimated that more than $45 billion was under management by managed futures trading advisors which increased to $334 billion by the end of the second quarter in 2012. 1 cmegroup.com BENEFITS OF MANAGED FUTURES By their very nature, managed futures provide a diversified The benefits of managed futures within a investment opportunity. Trading advisors can participate in more well-balanced portfolio include: than 150 global markets; from grains and gold to currencies 1. Potential to lower overall portfolio risk and stock indices. Many funds further diversify by using several 2. Opportunity to enhance overall portfolio returns trading advisors with different trading approaches. 3. Broad diversification opportunities In this example below, the overall risk (as measured by maximum 4. Opportunity to profit in a variety of economic drawdowns) is reduced from -63.6% to -35.9% and the return environments increases from 6.51% to 19.78%. This is mainly due to the lack of correlation and, in some cases, negative correlation between 5. Limited losses due to a combination of flexibility come of the portfolio components in the diversified portfolio. and discipline There is even negative correlation between stocks and managed futures in this example, as the two markets move independently from each other. COMPARISON OF A STOCKS ONLY VS. DIVERSIFIED PORTFOLIO ANNUAL RETURNS AND MAX. DRAWDOWNS 20% 19.78% 20% 10% 33.3% Managed Futures Dow Jones 0% 6.51% –10% STOCKS DIVERSIFIED PORTFOLIO –20% DIVERSIFIED ONLY PORTFOLIO OCKS –30% ONLY ST –40% 33.3% 33.3% 40% 40% Nikkei 225 MSCI World Stocks Bonds –35.9% –50% Correlation: Correlation: –63.6% Dow Jones – Nikkei 225: 0.467 Stocks – Managed Futures: –0.018 Dow Jones – MSCI World: 0.843 Managed Futures – Bonds: 0.052 Annual Return MSCI World – Nikkei 225: 0.686 Bonds – Stocks: 0.201 Max. Drawdown Based on a period from 1/80 to 3/12. Managed Futures Barclay CTA Index, Bonds BarCap US Agg Total Return Value Unhedged, Stocks MSCI World Index.Source: Bloomberg/CME Group The Barclay CTA Index is a leading industry benchmark of representative performance of commodity trading advisors. There are currently 602 programs included in the calculation of the Barclay CTA Index for the year 2012, which is unweighted and rebalanced at the beginning of each year. To qualify for inclusion in the CTA Index, an advisor must have four years of prior performance history. Additional programs introduced by qualified advisors are not added to the Index until after their second year. These restrictions, which offset the high turnover rates of trading advisors as well as their artificially high short-term performance records, ensure the accuracy and reliability of the Barclay CTA Index.
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