A SHORT HISTORY OF MANAGED FUTURES

Managed futures funds have experienced a steady influx of capital over the last decade, increasing from around $5 billion at the end of the 1980s to over $131.9 billion by the end of 2004. The data suggests there is plenty of room to grow. The markets that managed futures managers operate in are simply huge. In the last quarter of 2004 the combined value of trading in interest rate, stock index, and currency contracts on organized exchanges was $279 trillion. Readers should note that many currency contracts are not traded on exchanges but are negotiated directly with banks.

Much of the growth in managed futures funds can be credited to greater investor awareness of the diversification benefits that managed futures can add to investment portfolios.

Unlike traditional securities such as stocks and bonds, futures contracts are a derivative instrument, one whose value depends on the value of an underlying instrument. Futures contracts were originally developed to help reduce risk for farmers by ensuring a guaranteed price for their crops. The price of a commodity was established on the day of contracting and a small deposit placed by the purchaser to ensure delivery. The actual delivery occurred on a future date, and the outstanding payment was settled. This allowed farmers to establish future prices for commodities such as wheat and helped merchants establish costs in advance of a purchase.

Organized futures markets began with the opening of the Chicago Board of Trade (CBOT) in 1848 as American Midwest farmers trading with East Coast merchants needed to bring order and standardization to the chaotic conditions that existed in their industry.

During the 1970s, the commodities exchanges began to develop a number of financial futures for hedging interest rate and currency risk. The number of financial instruments for hedging, or speculating, has grown exponentially since 1980.

Today, managed futures provide direct exposure to international financial and non-financial asset sectors. Trading advisors have the ability to trade in over 100 different markets worldwide. These markets include interest rates, stock indexes, currencies, base/industrial and precious metals, energies, and agricultural products. There are now over 30 commodities exchanges, and futures trade essentially 24 hours per day. Futures trading is expected to continue to expand exponentially over the next decade as record numbers of both retail and institutional investors discover the benefits of investing in managed futures.

Source: Much of the information for this article was sourced from Man Investments, Inc.

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