The good news for Introducing Brokers (IBs) offering direct managed futures accounts might be found in industry growth projections.
Bold industry discussions are eyeing a target of $3 trillion in managed futures assets under management. That’s a long way from the current level of $267 billion, according to the latest 4th quarter estimate from Barclay Hedge. If this were to come even close to true, the resulting explosive growth would not only be historic in the cloistered futures and options industry, but more significantly it would represent a monumental shift in the core investing landscape. While this may sound a little optimistic if not wildly aggressive, this milestone just might be realistic when some core analysis is applied.
There will be introducing brokers (IBs) that succeed in this new environment – but also many that fail to adapt to this new world. Yes, with managed futures growth is a double edged sword bringing opportunity as well as challenges.
This is the first of a series of three articles that outline the growing opportunity for IBs, highlights how to handle competition and shows IBs how to "talk"managed futures portfolio diversification like an asset management professional.
This series of articles touches on several key points:
- This article provides analysis of how it is plausible managed futures grow from $267+ billion to $3 trillion.
- Next month’s article shows how rapidly expanding choices with different account structures will result in new and powerful competition from Wall Street. This article touches on the new competition’s weaknesses and shows IBs how to properly position themselves to prosper.
- The third article shows IBs how to "talk" managed futures in a persuasive fashion – and avoid common mistakes when building uncorrelated managed futures portfolios, a topic addressed in a coming managed futures course March 19th.
The book High Performance Managed Futures was written with the primary goal to help nudge an interesting asset class into the mainstream. The book shows how to "talk" managed futures portfolio diversification and overcome common portfolio building and management mistakes. There are a number of bright industry participants that are working towards a similar goal. The key for introducing brokers is to recognize how they can position themselves and benefit from what could be a $3 trillion industry. This topic will also be addressed in a Northwestern University managed futures course Saturday, March 19 which IBs can attended online or in person in Chicago.
Managed Futures Reaches $3 Trillion by 2021
It is my projection (and thoughts echoed by others) that by 2021 managed futures will have three trillion in assets under management. Here are some core issues likely to drive future growth:
Investor Demand Continues to Rise
Investor demand for a truly diversified investment portfolio cannot be filled with stocks alone. As investors recognize the truth about stock market "diversification" and investment professionals realize that modern portfolio theory only works with truly uncorrelated asset classes, demand will increase. That leaves managed futures as the logical and best choice. Recognize that the stunning 700% growth rate in managed futures came from investors who were required to mostly circumvent their financial advisor to directly access CTAs. That’s a lot of work and demonstrates the strong desire on the part of investors to build equity neutral portfolios. As investors become more aware of the managed futures asset class and the message of "equity neutral" investing becomes more commonplace in the media, demand could rise even further. While past performance does not always indicate future results, projecting the past meteoric rise of managed futures into the future provides a stunning look at the asset class.
Financial Advisor Demand
The strongest response to the book High Performance Managed Futures has come from financial advisors. But they all have one significant issue: accessing the investment is difficult and current mutual fund offerings with established track records are less than exciting. The average performance an investor would experience in a fund product funds is generally far less than that of a direct account, something pointed out on page 17of the book under the section "Wall Street’s Motivation for Keeping Managed Futures a Secret." IBs need to understand how to use this information to compete.
Right now traditional financial advisors (once referred to as “stock brokers”) use futures and options in less than half of 1% of all their portfolios. When that ridiculously low amount of usage starts to change, it could dramatically impact assets under management. After the numbers are run, financial advisors stand to monetarily benefit from adding managed futures into their client’s portfolios – depending on their compensation and regulatory structure.
Just imagine if financial advisor participation in managed futures to the tune of around 20% of their clients assets, and then industry growth could become exponential. This acceptance by the traditional stock market dependent financial advisor is a competitive threat, which we show IBs how to address later in this article, but it also brings wider acceptance and interest to the asset class, which benefits IBs.
Ease of Access
From Wall Street’s perspective, accessing managed futures has been difficult. We are currently under the worst case scenario: it is difficult for financial advisors to properly access the asset class, and they tend to sell against proper diversification with managed futures, saying it is too "risky." How to handle these "risky" comments are addressed starting on page three under the heading "Stock Market Safety and Other Myths."
Once financial advisors have easy access to the asset class and the equity world collectively recognizes the benefits of true asset diversification, then managed futures could experience explosive growth.
The growth of managed futures mutual funds is likely to dramatically change the managed futures landscape. Increasingly we will likely see strong, diversified offerings emerge, as leading managed futures players have already entered these waters. With ease of access to strong managed futures mutual funds, the asset class flourishes – and it is here that the IB needs to prepare for competition. Some people are predicting the decline in the direct managed futures account structure, but I don’t think the benefits of a direct account can be discounted – and it is these benefits IBs must understand and leverage, which are detailed in chapters four and five. Second, a middleware software solution needs to be developed so that financial advisors can easily access direct managed futures accounts from their UMA asset management platforms and provide proper reports. Once the difficulty of accessing managed futures is overcome, equity world will conduct the revenue math and demand could increase rather dramatically.
Equity wire houses and broker dealers do the math
After equity brokerage firms receive demand from influential financial advisors, they will do the managed futures math. In particular, when they recognize how certain managed futures account structures literally double their revenue compared to a traditional stock and bond portfolio – and they have easy access and appropriate management tools.
Once broker dealers understand the enhanced revenue opportunity with managed futures, don’t be surprised to see the equity world acquiring managed futures savvy IBs who can handle this portion of portfolio development. The enhanced revenue a BD may receive from converting 20% of their traditional stock and bond assets into managed futures combined with demand from financial advisors – an event a Morningstar report recently projected – we could see a number of interesting business combinations cutting across equity / futures industry lines, which may present opportunity for properly positioned IBs.
While it will be interesting time to be in the middle of the managed futures industry, the fact is that interest from financial advisors into managed futures will likely bring strong competition, which is the topic of the next article and the Northwestern University managed futures course.
Mark Melin, author High Performance Managed Futures and division director at PFGBest. If you have questions or comments regarding any of the items in this article, contact Mark at mmelin@pfgbest.com. To register for the upcoming Northwestern University managed futures course, visit the Northwestern Site at http://bit.ly/g0VY6R or www.Go2ManagedFutures.com/Northwestern.
