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