Unlike what it sounds, a managed future is not about a college choice or a personal growth plan. On the world of investment and finance, a managed future is a type of investment choice. Unfortunately, many individuals without a finance background may not understand exactly what this is, so let us take a look at what this choice could mean to you.
Q: What is a Future?
A: A future is basically an agreement between the investor (or buyer) to buy something at a set price sometime in the future.
Q: Is this something new?
A: No. Futures have existed for more than 30 years, but are sometimes considered an alternative investment due to their lack of popularity among the general population.
Q: What is a hedge fund?
A: To understand this, you have to understand there are two main players in the futures market. There is a Speculator and there is a Hedger. The Hedger will enter a contract to purchase or sell an item to guard against price risk. A great example of a Hedger is a farmer who will enter into a contract to purchase seed today, but not for shipment in 6 months. The reason for purchasing seed today is that the farmer believes the future price of seed will increase in the upcoming months.
The speculator is someone who is not intending to minimize risk, but instead wants to profit from the increase in price. The speculator is not someone who intends to take physical possession of the commodity, but is in the market only to make money.
A hedge fund therefore is a fund designed to engage in short selling.
Q: OK - what does short selling mean?
A: There are two ways to buy and sell - either LONG or SHORT. Short buying or selling is focused on commodities that may be over-valued now. For example, the hedger farmer is going to secure a contract to sell his corn at today's prices because he thinks that corn prices are going to drop in the future.
Buying or selling long is focused upon commodities that may be under-valued now. A speculator may purchase gold contracts today because he believes that gold prices will increase in the future and will sell at the higher price.
Q: What is a managed fund?
A: A managed fund is one that has a professional full-time administrator of the fund who is responsible for purchasing and selling futures in order to make money. Many managed funds are rather secretive and the strategies used by the administrator can vary as widely as their own personality.
Q: Are they a safe investment?
A: The answer is yes and no. It really depends upon the strategy, knowledge and experience of the administrator.
In conclusion, a managed future fund is the perfect way to introduce diversification to your portfolio. But it is also an investment choice that requires some understanding and trust in the fund purpose and the administrator of the fund. If you are interested in this type of fund, take an afternoon and do a little research to find the one that best meets your needs.
Author Resource:-
Caterina Christakos is an experienced investor and instructor with World Capital Institute. To learn more about managed futures go to:http://www.highyieldinvestmentreview.com
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