One of the key tenets of modern portfolio theory is that more efficient investment portfolios can be created by diversifying among asset categories with low to negative correlations with each other that is, the performance characteristics of these asset categories are independent of each other. One of the most proven and dynamic asset classes with a low correlation to the stock market is the industry of professional commodity traders. Commodity trading advisors (CTAs) represent a class of professionals who trade commodity and financial futures on regulated global futures and options markets.
What sets these traders apart? CTAs provide track records of how they have performed for their clients. Sophisticated investors, pension funds, institutions, endowments and trusts have discovered that the top tier of CTAs have demonstrated equal or superior records of reward to risk compared with equity traders and mutual funds. Through 1995, more than $21 billion were actively invested in managed futures in North America.
Landmark studies have proved that adding Ctas to portfolios of stocks and/or bonds decreases risk of loss while also increasing the overall rate of return. According to a study written by John Litner of Harvard University, The combined portfolios of stocks (or stocks and bonds) after judicious investments, in leveraged managed futures accounts, show substantially less risk at every possible level of expected return than portfolios of stocks (or stocks and bonds) alone.
This is extremely important when you realize that unlike the stock market, top CTAs are not dependent on the continuation of a bullish stock market. CTAs can yield potentially attractive returns in bull or bear markets. Further, CTAs do not rely on trends in the stock market but can seek profit opportunities in more than 50 commodity and financial futures markets, both in the US and around the world.
FIGURE 1: THE CTA CONSISTENCY INDEX (CCI). This index takes 20 factors into account in rating CTAs.
