What is Managed Futures Investing? An Interview with Bob Worthington, President of Hatteras Funds

What is man­aged futures?

In 2013, Asset Strate­gies will inter­view peo­ple in the finan­cial field to get answers to your questions.

Our first inter­view is with Bob Wor­thing­ton, Pres­i­dent of Hat­teras Funds.

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Hi, I'm Sheldon Harber, President of Asset Strategies and today we have the pleasure of speaking with Bob Worthington of Hatteras Funds, based in Raleigh, N.C. 

Today we want to talk about managed futures. Many investors have heard that term but what is a managed future?

Bob Worthington: A managed future is essential a portfolio where the manager is utilizing futures contracts and futures contracts can be on a plethora of different strategies, such as treasuries, interest rates, equities, commodities, those things then they can go long or short. Those particular futures and trying to create a fast portfolio so they can leverage off of trends that are going on in the marketplace to produce returns that typical don't correlate or move in tandem with an equity or fixed income markets.

Sheldon: So, when you say long or short for the uninformed investor, what does that really mean?

Bob: Long is a traditional type of purchase for example So in this case if you’re going long on a future your making a purchase and think of it as a call auction. It's akin to buying stock and owning that stock in this case, you're going long in the future. So you own that position and if it goes up, you'll benefit from it. By gong short means it's that you've sold that position knowing that you'll buyback at a certain price or buyback in the future at a price it might be. Therefore you're going to benefit if the price of that future or that security decrease, so you're hedging your portfolio a little bit to reduce volatility associated with those instruments.

Sheldon: You mentioned commodities. I know often times when I use that word with my clients, the red flag goes up and they start thinking very high risk such as pork bellies and there are number of different types of commodities. What are some examples?

Bob Worthington: Again, it’s anything they think about soft and hard metals, copper, tin, palladium, platinum they can be soft commodities like corn, milk, wheat, soybeans those kinds of things. So the experts typically, not all of them, but many of them came out of the CBOT, CME there they have expertise looking for trends that go on in the wheat area, in the corn area, or developed mathematical model spot trends in different types of commodities or again, equity future or fixed income futures. And that they will take position based on what their models say.

Sheldon: When people think about risk in their portfolio, I think another misconception is that the stock market bad and the futures are going to be bad. How do you see futures fitting into a portfolio and correlating with the stock market?

Bob Worthington: Well, I would argue that the data that backs this up is managed futures. It's called a non-correlating asset class that there is even better than long short equity hedge funds or long short debt funds. So managed funds historically has had a very low or negative correlation to equity prices. A good example of that would be 2008 which everyone remembers for some bad reasons, right? Especially later in the year when the equity markets completely tanked.

But if you look at the returns of managed futures managers in 2008, they were actually positive. So again, that correlation was negative, meaning equities were down, managed futures were up. Now in 2009 when there was a strong rebound in the equity markets, managed funds actually struggled but that was ok if you had managed futures in your portfolio for both of those years. You actually had a much lower volatility of your returns. And you balanced it out and smoothed out the returns. That is why many smart investors and advisors such as you use managed futures to balance out exposure to equity or fixed income exposures.

Sheldon: We need to point out to our audience in a rising stock market, managed futures are likely to underperform and investors need to consider their allocation of managed futures to their overall portfolio. In the past the way investors got involved in managed futures, they had to have a large amount of money invested. It wasn't liquid but it seems times have changed.

Bob Worthington: Times have changed. It's changed across the spectrum of alternative investments. Within the managed futures space, Where you used to have a quarter of a million, half million, a million dollars to invest in a managed futures manager, now you can do it today in a mutual fund where the minimums are quite low. And you can invest in a mutual fund that has a single manager managing that portfolio. But you can also invest in a mutual fund where you have a number of different managers put together in a portfolio which balances out or even compresses volatility even more.

So the good news on that are investors and advisors like you have broader choices available and don't need a lot of money to get a lot of exposure to the space. 

Sheldon: I suppose there is a difference in cost structure. I used to hear, "Well, the manager got a certain percentage, and then got bonuses, and you add it up, it seemed too expensive for most people. Has that changed?

Bob Worthington: A little bit and I'll take you through that. First, I would always say when you're looking at any investment vehicle, whether it’s a passive index on the equity side, a fixed income manager, equity manager, hedge fund manager, a hedge fund mutual fund, you should always look at Meta fees. The alternative universe has proven while fees have been higher, they've added value in a number of different ways because of their expertise.

Now in managed futures, for the most part even the mutual funds. You still have expenses that are pretty high. For example, if you're utilizing a most managed futures fund to fund, meaning they'll take it and spread the risk across five or six futures managers, are still done so that you're paying the higher fees that have been associated with futures. 

However, there are a couple of funds out there where you're investing with managed futures known as their partnership that can charge that fee plus profit. But a couple of mutual funds are out there where you are investing with a managed futures manager in a separate account. Therefore, the fees being paid to that manager are much lower because under mutual fund rules they can't charge that profit or incentive fee. So fees are starting to come down in the managed futures area which again I think is a benefit to investors.

Sheldon: We need to let our readers know that funds that employ managed future strategies charge higher fees than funds that do not. Bob, we thank you very much for your time today and your great education. If you have any additional questions, please call either of us regarding investing your money in managed futures.

If you have any questions about Hatteras Funds, contact Hatteras Funds through their website, www.hatterasfunds.com.

The views expressed are by Sheldon Harber and should not be considered legal or tax advice. Please see a qualified attorney or accountant for answers to specific questions.

Investors should carefully consider the investment objectives, risks, fees and expenses before investing. For this and other important information please obtain the investment company fund prospectus and disclosure documents from your Rep/Advisor. Read this information carefully before investing. Diversification and asset allocation strategies do not assure profit or protect against loss.

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