The great thing about the world is, everyone is unique in their own way. One person may have completely opposite characteristics from another, but both seem the same at first glance. As with most alternative investments, things are no different in the managed futures market. Though many of the less experienced may create blanket assumptions, every managed futures trader is different in their strategy, risk assessment, and underlying skill set.
In this article, we will explain the potential profit of managed futures by grouping traders based upon the “risk” of their strategy. This will allow you to understand what profits you can expect for various risk tolerances, and will define which is right you. Remember, though high returns are not always associated with high risk, most of the time they go hand in hand. Scroll down, and take a look below.
Managed Futures Trading Strategies
Low Risk: Low risk managed futures accounts will aim primarily for one goal, positive returns every month. The main focus is preservation of capital, and long term growth through account compounding. Many times, these traders may have expertise in only one futures market, and will make their profits the same way year after year. In addition, they may have “stop losses” as low as 2-5% of the account value to prevent large draw downs. This is the most common type of trader you will find in the managed futures industry, and will typically produce returns between 20-45% per year.
Moderate Risk: Managed futures traders with moderate risk strategies capitalize on big swings to make profits, and may trade futures positions without cover (“naked”). Though these traders may aim for high profits, they have a predefined stop loss %, and a profit goal for every month. Also, many traders may implement trades in a few major commodities, rather than specializing in just one futures market. With a moderate risk strategy, the returns for managed futures investments may range between 50-90% per year.
High Risk: Those who would be considered “high risk” managed futures traders only have one goal in mind, profit. Some of these traders can use such high leverage that they can turn 50k into 1M in 6 months, but during that time they are always “naked” and exposed to risk. Despite their amazing success, there is usually a huge reality check at some point that refines their strategy. Generally speaking, you are more likely to find “high risk traders” who manage futures privately. In most cases, traders with a license want to mitigate their risk and achieve steady profits, not aim for record-setting returns. With “high risk” managed futures investments, the returns usually range between 100-300% per year, but can be far greater!
As we have explained before, each trader is unique. Despite the common assumption, many traders can have low risk strategies, and still be able to achieve very high profits. Though strategies like this are extremely complex, options traders from all over the world profit in low risk environments every day.
If someone is to ask you, “what returns can be produced in a managed futures account”, you should now know, it depends on your investment background. The fact is, you must always match your risk tolerance and investment goals with that of the managed futures trader you are investing with. Each trader is right for a certain type of investor, and is not for everyone. Though we wish it was this simple, you should never base your decisions solely upon the returns offered by a futures trader. This can lead you to invest with a trader with conflicting goals, which will most likely present a problem for you in the future.
To summarize, managed futures investments are great, but only for the savvy investor with large investment goals. If you are an investor with money to risk and are looking for high returns, then you may want to give managed futures a shot! If you have a limited amount of capital and are thinking about striking it big, then you are following a path to disappointment.
InsideTrade LLC Staff
(412) 235-2855 (412) 235-2855
Submitted by InsideTrade Staff on Wednesday, 23 September 2009
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