Futures and options have been used for centuries both as a risk management tool and return enhancement vehicle, yet managed futures, as an investment alternative, has been available only since the late 1960s. More recently, institutional investors such as corporate and public pension funds, endowments and trusts and bank trust departments have been including managed futures as one segment of a well-diversified portfolio.

Past performance is not necessarily indicative of future results

Commodity Trading Advisors: Assets Under ManagementAs shown in Exhibit 1, the dollars under management for Commodity Trading Mvisors in the Managed Futures sector has grown from less than $15 billion under management in 1990 to approximately $30 billion in 2000. Moreover, this number does not include the billions of dollars under management or in proprietary trading programs of major financial institutions which trade similar strategies but which do not report to traditional data sources. (1)

This growth in investor demand for managed futures products indicates investor appreciation of the potential benefits of managed futures (e.g., reduced portfolio risk, potential for enhanced portfolio returns, ability to profit in different economic environments, and the ease of global diversification) as well as the special benefits that futures/options traders have in trading traditional asset classes (e.g., lower transaction costs, lower market impact costs, use of leverage, and trading in liquid markets). In addition, the market integrity and safety of trading on organized exchanges for futures/options contracts provide further assurances of transparency and regulation.

Managed Futures: Risk and Return Performance
While CTAs have often been regarded as high risk investments, over the period 1990-2000 the average annualized standard deviations of individual CTAs and the Dow Jones 30 industrials were similar; that is, approximately 25% (2) More importantly, investment theory has shown that assets should be compared on a risk-adjusted basis (e.g., mean return/standard deviation). Also, the potential benefit of adding an asset to an existing portfolio may be measured by an assets excess breakeven return; that is, the difference between its actual return and the return required to improve an asset’s or portfolio’s Sharpe ratio.

Results in Exhibit 2 show that, over the past eleven years (1990-2000), investment in a portfolio of commodity trading advisors (e.g., Zurich CTA$) provides stand-alone risk and return benefits generally similar to existing U.S. and world stock and bond investments. (3)

The individual Sharpe ratios are as follows:

Zurich CTA$ (.60),
S&P 500 (.71),
Lehman Brothers Government/Credit bond index (.58),
Lehman Brothers World Government bond index (.30),
MSCI world stock index (.27).

(1) Assets under management in publicly traded funds or private pools has remained in the range of $8 billion to $10 billion dollars over the period 1995 to 2000.
(2) The annual and monthly returns presented in their nominal form. Annualized standard deviations are derived by multiplying the monthly data by the square root of 12.
(3) Zurich Commodity Trading Advisor Universe and Managed Futures Pools and Fund Universe returns replace the Managed Accounts Reports (MAR) data used in previous studies. Zurich recently purchase the MAR CTA and Hedge Fund databases.

Past performance is not necessarily indicative of future results

Portfolio I 50% S&P 500, 50% Lehman Brothers Gov/Corp Bond
Portfolio II 40% S&P 500, 40% Lehman Brothers Gov/Corp Bond, 20% Zurich HF Fund of Funds
Portfolio III 90% Portfolio II and 10% Zurich CTA’s
Portfolio IV 50% MSCI and 50% Lehman Brothers Global Bond
Portfolio V 40% MSCI, 40% Lehman Brothers Global Bond and 20% HF Fund of Funds
Portfolio VI 90% Portfolio V and 10% Zurich CTA$

Source: Zurich, Datastream

More importantly, managed futures offer the investor an increased return to risk ratio when considered as an addition to widely diversified asset portfolios. The Sharpe ratio of the portfolios (Portfolio Ill and VI), which indude at least a 10% investment in managed futures, dominate those that invest solely in traditional stock and bond investments or in stock bond, and hedge funds (e.g., Portfolio Ill vs. Il and Portfolio VI vs. V). The individual portfolio Sharpe ratios are as follows: Portfolio I (.79), Portfolio 11(1.03), Portfolio III (1.11), Portfolio IV (.36), Portfolio V (.60), Portfolio VI (.65).

The benefits of managed futures in diversified portfolios is further illustrated in Exhibit 3 in that when the ZCM CTA$ is added to a S&P 500, Lehman Brothers Bond index, as well as an S&P 500 and Lehman Brothers bond portfolio, increased risk adjusted investment opportunities exist.

Past performance is not necessarily indicative of future results