Managed futures (CTA).

In plain English

Managed futures programs are run by commodity trading advisors who buy and sell futures on stock indexes, bonds, currencies, energy, metals, and crops. Most follow trends, meaning the system buys markets that have been rising and sells short markets that have been falling, holding until the trend breaks. Because futures require only a margin deposit rather than full payment, a program can hold large positions with modest cash, which magnifies both gains and losses. The appeal to portfolio builders is that trend results often have little relationship to stock market results, especially during long declines. The cost is long stretches of flat or negative performance when markets move sideways.

01Why it matters

This is one of the few widely sold strategies designed to make money when markets fall, and the price of that is frequent small losses while nothing is trending.

02The math, step by step

Say a program posts $2,000,000 of margin to control $20,000,000 of futures, ten times the cash. A 5 percent move in the underlying markets is $1,000,000, which is 50 percent of the posted margin. The same math applies in reverse when the trend turns.

Illustrative example. The amounts here are hypothetical, chosen to show how the math works, not real quoted rates or figures.

03What this is NOT

04Receipts

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