The principle of diversification, one of the mostimportant aspects of sound investing, encouragesyou to spread your dollars out over abroad range of investments. The world of investmentsoffers a great deal to choose from besides juststocks and bonds. If you're really looking to diversifyyour holdings, managed futures can add a wholenew dimension to your portfolio. They can be verycomplex and involve a significant amount of risk, sothey are not suited for every physician-investor. But ifthe futures market is something that interests you, itmight be helpful to learn a little more about theseunique investments.
To get a better idea of how a managed futuresaccount works, you should understand the underlyinginvestments in the account, known as futurescontracts. These represent a contract to buy or sell apredetermined amount of a specific commodity, afinancial instrument, or an index at a certain price bya certain date. The contract can either gain or losevalue, depending on the relation of the price of theunderlying commodity or index to the price stated onthe futures contract.
For example, a physician-investor might enter intoan agreement to buy 100 ounces of gold at $400 anounce in June of next year. At any time in between, ifthe actual price of gold rises above $400 an ounce,then the physician-investor can sell their contract andmake a profit. Keep in mind that if the price dropsbelow the $400 mark when the contract is up, thenthe physician-investor will have lost money. This is avery simplified explanation of how futures work, butcontracts on other things such as currencies, interestrates, and financial indexes also work in much thesame way. The goal is to make a profit by correctlydetermining the direction the markets will movewithin a given period of time.
The most common way you can invest in managedfutures is through a managed futures fund,which is usually structured as a limited partnershipinvestment. This type of fund represents a pool ofinvestment dollars gathered from various investors.By pooling your money with others, the cashrequirements for each investor in the fund will bemuch less than if you tried to establish an individualaccount. Investing this way also helps to limit theamount of risk you are exposed to as an individual.A full-time professional money manager, known asa commodity trading advisor, makes the investmentdecisions, constantly reviewing the market for profitableopportunities.
Like most investments, futures involve a certainamount of risk. There is the possibility of enduringa sizable loss when investing in futures becauseactual prices could always fall short of contractprices. But managed futures also offer several benefitsthat could make them an important part of awell-balanced portfolio.
In addition to professional money management,managed futures offer access to global marketopportunities. Keep in mind that global investmentsinvolve additional risks, including currency fluctuations,political and social instability, limited publicinformation, and possible changes in taxation. Butthey also afford you another distinct advantage:Results from futures investments are completelyunrelated to traditional stock investments. Regardlessof whether the stock market is rising, declining,or even trading flat, futures markets could be movingthe same or opposite. In fact, statistics showthat the returns from investing in futures and thosefrom investing in stocks are very often uncorrelated.One could be going up while the other is goingdown, or they might be moving in the same direction,but to varying degrees. This makes managedfutures a diversification opportunity that can alsoprovide investors a hedge against movements intheir other investments.
is vice president, investments, and a financial
consultant with AG Edwards in Hillsborough, NJ. He welcomes
questions or comments at 800-288-0901, or visit www.ag
edwards.com. This article was provided by AG Edwards & Sons,
Inc, member SIPC.
Joseph F. Lagowski