Managed Futures: Then & Now
Futures trading (or what resembled it) can be traced back to as early as 1750 BC to Ancient Mesopotamia. One of the earliest written documentation of futures trading can be found in Aristotle’s ‘Politics’. He tells the story of Thales, a philosopher who develops “a financial device, which involves a principle of universal application”. He tried his hand at price forecasting and predicted that the olive harvest would be unusually good in the upcoming autumn. He drew contracts with local olive-press owners to deposit his money with them to guarantee him the exclusive use of their presses once the harvest was over. Thales haggled the owners to low prices because no one knew whether the yield would be ample or pathetic and therefore press owners were willing to hedge against the possible outcome of a low yield. When harvest season came around, demand for the use of these olive presses exceeded the supply, and he sold his contracts to use the presses at a much higher price than he has initially paid the press owners.
There’s many instances in history that resemble what a present-day futures contract looks like. The first “modern” organized futures exchange was formed in 1710 in Osaka, Japan as the Dojima Rice Exchange. It wouldn’t be until 1848 that the Chicago Board of Trade was formed. There, trading was initially done through forward contracts. The first standardized futures contracts weren’t introduced until 1865. Futures trading rapidly gained popularity, and by 1922, the federal government proposed & passed the first regulations for futures trading: the Grain Futures Act. The act was later replaced by the Commodity Exchange Act, and in 1974, the Commodity Futures Trading Commission was established under the Commodity Futures Trading Commission Act.
The new regulations led to the official recognition of a group of professional fund managers: Commodity Trading Advisors, or “CTAs”. Also known as managed futures, the funds can take both long & short positions in futures and options contracts in the global commodity, interest rate, equity, and currency markets. By the late 1970s, managed futures began to gain popularity with investors who sought to spend less time constantly monitoring markets, saw lackluster opportunities in the investment vehicles they knew well, or simply wanted to remove themselves from the emotional component of making their own trading decisions.
The managed futures industry has grown rapidly over the last 30 years, and is considered as being one of the fastest growing alternative investment strategies. The estimated total assets under management broke the $1 billion mark in 1985. It would go on to break $100 billion in 2004, and in 2017 the number is over $340 billion.
Due to the non-directional nature of many managed programs, CTAs commonly outperform the more conventional stock index based fund. Because futures markets were created to allow traders to enter long or short positions based on their needs, managers can profit with equal opportunity from the increase or decrease of the price of an asset. Unlike equities, the margin required for a short futures position is the same as a long. This enables equal profitability from long & short positions without the restrictions of additional cost.
Today, managed futures help many investors gain exposure to multiple asset classes in a non-directional, diversified, transparent and cash-efficient way that many other financial instruments do not.
For additional information on Ironbeam’s CTA programs, and how they may help your portfolio, contact our Private Client Group.
Phone: (312) 765-7200