2194 Twain Avenue
Carlsbad, CA 92008
Tel: (760) 809-2700; Fax: (760) 931-6126
Email: info@schwabcapital.com

MANAGED FUTURES

One of the fastet growing asset classes in America

Nobel Prize winning research suggests that allocating a portion of your portfolio to managed futures can increase overall return while reducing risk...a goal that all investors should strive towards.

Growing Industry

Growing Industry The term Managed Futures describes an industry made up of professional money managers known as Commodity Trading Advisors (CTAs). CTAs are regulated by the Commodity Futures Trading Commission and the National Futures Association. These trading advisors manage clients' assets on a discretionary basis using global Futures Markets as an investment medium. Managed Futures have been used as an investment alternative by high-net-worth individuals for more than 20 years. Growth of Managed Futures Assets Source: Barclay Trading Group

More recently, institutional investors such as corporate and public pension funds and banks have made managed futures one segment of a well-diversified portfolio. Assets under management grew from $500,000 in 1980 to over 35 billion by 2001, and continue to grow. The acceptance of Managed Futures by these investors may be due to increased institutional use of the Future Markets for risk-management programs. Portfolio managers have become more familiar with financial-based futures contracts.

Over the last several years, a growing number of institutions and individual traders/investors have allocated billions of dollars into managed futures.

According to The Barclay Group, money under management during the 4th quarter 2004 was $131.9 billion, a 12.06% increase from the previous quarter. This represents a 52.49% increase in assets since the beginning of 2004.

The acceptance of Managed Futures by these investors may be due to increased institutional use of the Future Markets for risk-management programs. Portfolio managers have become more familiar with financial-based futures contracts.

Additionally, investors want greater diversity in their portfolios. They seek to increase portfolio exposure to international investments and nonfinancial sectors, an objective that is easily accomplished using global Futures Markets.

Investment Advantages

Investment Advantages An equivalent amount of money can control significantly more value in futures and options on futures, than in stocks. This is called leverage. It is the availability of leverage that creates the perception of volatility, and it is primarily the use of leverage that creates the increased risks associated with trading futures and options on futures. However, leverage can also be a valuable tool. It is the controlled use of leverage and prudent risk management that can generate attractive risk-adjusted returns.

Potential for Enhanced Portfolio Returns

Potential for Enhanced Portfolio Returns In an uncertain economic environment, investors need to look at different ways of achieving their financial goals. Allocating a small portion (5-20%) of your portfolio to a managed futures program can have an impact on your portfolio's performance - regardless of what the stock market is doing.

Managed futures have become a great investment addition and alternative to stocks and mutual funds. A Chicago Mercantile Exchange and Chicago Board of Trade study concluded that portfolios with 20% assigned in managed futures, yield up to 50% more than stock and bond portfolios while possessing comparable risk. Managed futures are similar to mutual funds in that they possess the power to make investments that cannot typically be made individually.

This is substantiated by an extensive bank of academic research, beginning with the landmark study of Dr. John Lintner of Harvard University in which he wrote that "the combined portfolios of stocks (or stocks and bonds) after including 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."

The capacity of futures to enhance the returns of conventional investments has been acknowledged in a study conducted by Goldman Sachs. Covering a 25-year period, the study concluded that by "allocating only 10% of a securities portfolio to commodities, investors can vastly improve their performance."

Goldman Sachs' conclusion was supported by another study published by the Chicago Mercantile Exchange, one of the world's preeminent futures exchanges. According to the CME study, "Portfolios with as much as 20% of assets in managed futures yielded up to 50% more than a portfolio of stocks and bonds alone."

The Chicago Board of Trade's booklet, Managed Futures, Portfolio Diversification Opportunities, shows a portfolio with the greatest risk and least returns comprised of 55% stocks, 45% bonds, and 0% managed futures while a portfolio exhibiting the greatest returns and least risk, comprised 45% stocks, 35% bonds, and 20% managed futures.

As you can see from the above study, the portfolio with the greatest returns and least volatility included futures.

Reduced Portfolio Volatility Risk

Reduced Portfolio Volatility Risk Today's investors are confronted with the challenge of trying to choose and allocate among several global asset classes. While trying to maximize their portfolio gains, these investors are trying to minimize the volatility and risk in their portfolio. With virtually a zero correlation with stocks, one of the most attractive features of managed futures is its ability to add profound diversification to an overall investment portfolio

The Chicago Board of Trade has a good online publication on this topic called Portfolio Diversification Opportunities: Managed Futures.

While managed futures returns are volatile, combined with other securities in a larger portfolio, the low correlation of our program can actually reduce your portfolio volatility

One of the essential tenets of Modern Portfolio Theory is that more an efficient portfolio can be created by diversifying among asset categories with low or negative correlation. This can be especially true during times of high valuation of the Stock Market.

Ability to Profit in Any Economic Environment

Ability to Profit in Any Economic Environment Managed Futures trading advisors can take advantage of price trends. They can buy futures positions in anticipation of a rising market or sell futures positions if they anticipate a falling market. For example, periods of inflation, hard commodities such as precious metals, oil, grains and livestock tend to do well, as do the major world currencies. During deflationary times, futures provide an opportunity to profit by selling in a declining market with the expectation of buying, or closing out the position, at a lower price. Trading advisors can even use strategies employing options on futures contract that allow for profits potential in flat or neutral markets and can generate a profit from movements in markets whether they are up or down. Potential profit-making positions are virtually always available; it is just as easy to profit from falling prices as it is from rising or sideways prices.