For investors with the money and the stomach to brave the frontier, managed futures and hedge funds can spice up a portfolio. These vehicles pool money from individuals and institutions and invest the funds in a wider range of securities than traditional mutual funds. Both managed futures and hedge funds operate as limited partnerships under the direction of a professional money manager. However, these vehicles differ in several key areas: fee structure, risk and regulatory environment.
Managed futures and hedge funds are typically the domain of the so-called accredited investor. According to the Securities and Exchange Commission, this provision applies to institutional investors, such as banks and corporations, as well as individuals and allows the fund manager to circumvent registration. In order to be considered an accredited investor, your annual joint income must be more than $300,000 for each of the two past years.
Both hedge fund managers and Commodity Trading Advisors – specialized money managers that oversee managed futures – charge investors significant fees for their expertise; however, hedge fund managers tend to charge more. CTAs charge a management fee and performance fee – typically, two percent for the former and 20 percent for the latter. Hedge fund managers will charge management and performance fees, plus a surrender fee, which dings investors who leave the fund.
Both managed futures and hedge funds invest in securities beyond the traditional choices of stocks and bonds, including commodities, futures, options and derivatives. As such, both products incur more risk, yet they also tend to boost returns. However, hedge funds tend to be riskier — often due to aggressive investment choices on the part of the fund manager.
Managed futures tend to be more regulated than hedge funds; CTAs must pass a background check with the Federal Bureau of Investigation and register with the Commodity Futures Trading Commission. However, neither product is regulated by the Securities and Exchange Commission. The credit crisis of 2008 and the infamous Bernie Madoff scandal of 2009 initiated calls for “regulatory crackdowns” in the hedge fund industry, according to “Forbes” magazine.
- The Little Book of Alternative Investments: Reaping Rewards by Daring to Be Different; Ben Stein and Phil DeMuth
- Economy Watch: Managed Futures
- Barclay Hedge: What is a Hedge Fund?
- Forbes: How to Use Alternative Investment Strategies
- Securities and Exchange Commission: Accredited Investors
- Forbes: A Call to Cut Heavy Hedge Fund Fees
- Barclay Hedge: Managed Futures Overview
- Business Knowledge for IT in Prime Brokerage; Essvale Corporation Limited
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