Sunday, June 15, 2008

What are managed futures?

Managed futures are futures positions entered into by professional money managers, known as commodity trading advisors, on behalf of investors. Managers invest in energy, agriculture and currency markets (among others) using futures contracts and determine their positions based on expected profit potential.

A futures contract is a financial contract obligating the buyer to purchase an asset (or the seller to sell an asset), such as a physical commodity or a financial instrument, at a predetermined future date and price. Futures contracts detail the quality and quantity of the underlying asset and are standardized to facilitate trading on a futures exchange.

The potential benefits of managed futures are that the investments may help diversify one's portfolio and, under some conditions, minimize risk. For example, investing in currencies abroad may mitigate domestic risk. Managed futures may also help the individual to profit or minimize risk during periods of slow economic growth.

The potential downside is that futures investments are not guaranteed and they can be very volatile. There is also the possibility of human error because a manager is involved. In other words, if the manager makes an error it could cost the investor a bundle of money.

Finally, there may be some suitability issues as well. A minimum net worth of $150,000 (not counting your home and other items) may be necessary for investment. There may be some minimum income requirements as well.

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