44 February ~ July | 2009

industryinsightBy iFAST EDITORIAL TEAM

Important: See Disclaimer on Page 6 | iFAST INSIGHT 45

Managed futures are an asset class which traces its origins back to 1948. The managed futures in-

dustry is made up of professional money managers who are also known as Com-modity Trading Advisors or CTAs, says Aaron Smith, Managing Director of Su-perfund Financial Singapore. Superfund has 19 offices around the world and has been in Singapore since 2005.

“In the past year, we have grown and strengthened the team substantially and will continue to do so in 2009. Singapore has great potential and through continu-ous education, we believe investors will start to understand a new asset class they were previously not exposed to,” says Aar-on. In Singapore, Superfund’s managed futures funds are only available to inves-tors who meet certain net assets require-ments (for individuals with net assets of $2 million or income of $300,000 in the preceding 12 months and corporates with net assets of $10 million). They are also available to institutional investors and any person who invests more than $200,000 per transaction.

Aaron explains more about the features of managed futures in this interview:iFAST: Your expertise lies in managed future funds. How do they work?Aaron Smith: Managed futures were started in 1948 by Richard Donchian, a year before hedge funds were created. Managed futures describe an industry

which is made up of professional money managers who are also known as Com-modity Trading Advisors or CTAs. The money manager manages client assets on a discretionary basis using global futures markets as an investment medium.

All Superfund products utilise pro-prietary, fully automated trading systems which trade in over 100 broadly diversified futures markets around the world. Instead of a fund manager, we have a R&D team which programs mathematical formulas into our trading system and everything is done systematically, removing all human emotions. Every trade we enter, there is automatically a pre-calculated stop loss which is adjusted on a daily basis. If a trade goes against us, we are stopped out immediately.

iFAST: What are the differences and simi-larities between managed future funds and hedge funds?AS: The only similarity would be both managed futures funds and hedge funds are classified as alternative investments. But the underlying investments are very different. We trade only futures contracts which are listed and liquid. We can trade both long and short instead of one direc-tional bias. Managed futures are also high-ly regulated. From a correlation point of view, managed futures are not correlated to hedge funds so in effect they are two very different asset classes.

A Different Asset Class: Managed Futures Funds

Managed futures funds offered by Superfund Financial (Singapore) Pte Ltd are a relatively undiscovered asset class.

Article disclAimer: This article is not to be construed as an offer or solicitation for the subscription, purchase or sale of any fund. No investment decision should be taken without first viewing a fund’s prospectus. Any advice herein is made on a general basis and does not take into account the specific investment objectives of the specific person or group of persons. As some of the authors/contributors may have a personal interest in some of the funds commented on, investors should seek the advice of professional advisers regarding the evaluation of any product, unit trust or other financial instruments, report, index, opinion or any other content contained herein, to ensure the investment instrument is suitable for them. In the event that investors choose not to seek advice from a professional adviser, they should consider whether the investment instrument is suitable for them. Past performance and any forecast is not necessarily indicative of the future or likely performance of the fund. The value of units and the income from them may fall as well as rise. Opinions expressed herein are subject to change without notice. iFAST Financial and/or its licensed financial advisers representatives may own or have positions in the funds of any of the asset management firms or fund houses mentioned or referred to in the article, or any unit trusts or Singapore Government Securities bonds related thereto, and may from time to time add or dispose of, or may be materially interested in any such unit trusts or Singapore Government Securities bonds.

Important: See Disclaimer on Page 6 | iFAST INSIGHT 45

A Different Asset Class: Managed Futures Funds

iFAST: What are the pros and cons of managed futures funds?AS: The pros are you will get a very diversi-fied asset class that is uncorrelated (that is, it does not trade in tandem) with your usual traditional investments like equities and bonds so in a bear market it acts as a port-folio protection. It is also an asset class that performs in the bull market. The con would be the natural volatility of 20% if you look at it as a stand alone asset class but having said that, compared to the recent volatility suffered in the equities market, managed futures were less volatile. So incorporating managed futures into a portfolio, the low correlation will blend out the volatility.

iFAST: What are the correlation numbers between managed future funds and global equities and global bonds?AS: I’ve actually studied the period from January 1980 because that is the bull mar-ket and many have the misconception man-aged futures only do well during the bear market but that’s not true. It does well both in bull and bear markets, it’s just during the bull market nobody wants to look at any-thing else except stocks.

iFAST: What can investors and FAs expect from Superfund in the next few years?AS: Superfund is looking to grow our pres-ence in Asia for the long run and we are here to educate and offer an alternative in-vestment solution to complement any port-folio (subject to the investor’s risk profile). Managed futures are an asset class which has previously been Wall Street’s best kept secret as it was only available to the ultra high net-worth individuals and institutions. We are here to educate FAs and investors why it is an asset class every investment portfolio should have.

iFAST: Managed futures funds can adopt shorting strategies. Shorting is often seen as risky. Is this the case?AS: This is a common misconception. If you look at any markets, they go up and they also come down. We are shorting fu-tures and not stocks (for stocks you need to borrow). It is common in futures to go short. Just a bit of history, futures trad-ing started in 1840s Chicago when farm-ers came to sell their wheat and dealers

will ship it all over the country. The city had few storage facilities, with little proce-dures or grading, leaving the farmers of-ten at the mercy of dealers. This is when the opening of a central place where farmers and dealers could meet and deal in “spot” grain, meaning exchange cash for immediate delivery.

Hedgers use futures to protect them-selves against adverse movements in their underlying commodity. For example, a food processing company which cans corn. If corn prices go up, the com-pany has to pay the farmer more. Thus to hedge against higher corn prices, the company will buy corn futures to cover the amount of corn it expects to buy.

On the other side of the trade, if corn prices go down, the farmer will not be able to sell his corn at the price he would like. To hedge the farmer will sell corn fu-tures (short) to cover the amount of corn he expects to sell. So you see it’s natural to go short as well as long in the futures market.

iFAST: What are your views on the market? What asset classes and sectors are you most positive on this year and why? AS: We do not have a view per se as we use technical analysis. We believe all the information is already reflected into the price movements. However, we believe if the US continues to print more dollars, then gold is a safe haven because it holds its purchasing value.

iFAST: What is your preferred allocation between the different asset classes? Why? AS: We do not have a preferred allocation like traditional fund managers. We look at over 150 futures markets globally. When there is a breakout in technical analysis, we go either long or short. Traditionally, we are allocated to 50% in commodity futures and 50% in financial futures but this is not fixed.

iFAST: You recently commented that gold may hit US$1,500 an ounce – will we see this level this year? Why are you bullish? In more practical terms, can you run us through how a managed futures fund takes advantage of this view you have on gold prices? AS: There are a few reasons why we are bullish on gold, but mainly because

if you look at any paper currency to-day they are not pegged to any physi-cal asset. In the past 4000 years, gold has been the only currency and so was the US dollar until 1971 when Nixon took it off the gold peg. Since then paper currency has lost much of its value. Due to the US economic crisis, the government will be forced to print more money. This will erode the value of the currency even more. Gold is the only currency that will hold its value and there is a limited supply of it. Man-aged futures funds that are valued in gold ounces like Superfund’s will pro-vide diversification instead of just hold-ing physical gold.

iFAST: The lack of transparency on hedge funds and how they are managed is a deter-rent to some investors. The recent Madoff case doesn’t do much good to the hedge fund industry too. Do you think managed futures funds will also be seen that way? If yes, what are you doing to circumvent it?AS: There are numerous operational, structural and regulatory differences be-tween hedge funds and managed futures funds. First and foremost, managed fu-tures funds are and have been regulated around the world for many years and of-fer meaningful transparency. This is why education on what managed futures are and how they work is so important for investors to make informed investment decisions and not to view managed fu-tures in the same light.

iFAST: Has 2008 changed the way you invest?AS: Not at all – 2008 has been a great year for us. We have continued to trade exactly how we have been doing since the first Superfund product was launched in 1996. iFAST

iFAST INSIGHT’S DISCLAIMER: Please refer to the content and article

disclaimers on Page 6. in addition, Please note that restricted

authorised / recognised schemes may only be offered to certain

tyPes of investors and to accredited investors whose total net

assets or annual income exceed certain amounts. this aPPlies to

all restricted authorised / recognised schemes, including hedge

funds (whether single hedge funds, hedge fund-of-funds or

caPital Protected/guaranteed hedge funds).

Article disclAimer: This article is not to be construed as an offer or solicitation for the subscription, purchase or sale of any fund. No investment decision should be taken without first viewing a fund’s prospectus. Any advice herein is made on a general basis and does not take into account the specific investment objectives of the specific person or group of persons. As some of the authors/contributors may have a personal interest in some of the funds commented on, investors should seek the advice of professional advisers regarding the evaluation of any product, unit trust or other financial instruments, report, index, opinion or any other content contained herein, to ensure the investment instrument is suitable for them. In the event that investors choose not to seek advice from a professional adviser, they should consider whether the investment instrument is suitable for them. Past performance and any forecast is not necessarily indicative of the future or likely performance of the fund. The value of units and the income from them may fall as well as rise. Opinions expressed herein are subject to change without notice. iFAST Financial and/or its licensed financial advisers representatives may own or have positions in the funds of any of the asset management firms or fund houses mentioned or referred to in the article, or any unit trusts or Singapore Government Securities bonds related thereto, and may from time to time add or dispose of, or may be materially interested in any such unit trusts or Singapore Government Securities bonds.