Warning to Investors About Managed Futures

According to a Bloomberg Business article, Morgan Stanley has been enticing its customers to put their money into managed futures. This comes at a time when the Standard & Poor’s Index suffered a decline of 41 percent in the previous three years. Managed futures is an alternative investment strategy in which professional portfolio managers use futures contracts as part of their overall investment strategy. They provide portfolio diversification among various types of investment styles and asset classes to help mitigate portfolio risk in a way that is not possible in other investments. Typically, the accounts will have exposure to a number of markets such as commodities, energy, agriculture and currency. Morgan Stanley touted the managed futures to clients in this way: “If you’ve never diversified your portfolio beyond stocks and bonds, you should know about the powerful argument for managed futures. Managed futures may potentially profit at times when traditional markets are experiencing losses.” The bank then went on to explain that over 23 years, people who put 10 percent of their assets in managed futures outperformed those whose investments were limited to a combination of stocks and bonds. In 2012, more than 30,000 investors put in $797 million in a managed futures fund called Morgan Stanley Smith Barney Spectrum Technical LP. The fund then made $490.3 million in trading gains and income.

Investors who had put their money in that fund over the past decade lost $8.3 million after $498.7 million in commissions, expenses and fees were taken out and paid to Morgan Stanley. In all, 89 percent of the $11.51 billion of gains in 63 managed futures funds went to fees, commissions and expenses from January 1, 2003 until December 31, 2012. Twenty-nine of the funds suffered losses. Historically, fees associated with managed futures funds have been high. Brokers receive commissions annually of up to four percent in managed futures funds, so they have an incentive to recommend them. And brokers pitches regarding the funds are not always on point. The managed-futures market is opaque at best and not always understood. It is therefore risky for investors to put their money into these funds. Many brokers do not understand the risk involved with managed futures funds, and therefore, cannot recommend them responsibly.