Managing Risk in the 21st Century
The key to managing risk is proper diversification. This entails selecting asset classes whose historical performances are as uncorrelated as possible. Asset classes can be traditional (i.e., stocks, bonds, and cash) or alternative (i.e. managed futures, hedge funds, gold & silver, and real estate). With proper diversification, it is possible to decrease account volatility and potentially increase returns.
The value of cash and bonds has been eroded over time by inflation and will continue to do so. At the current rate of inflation (3.17%), $100 in 5 years time will be worth $85 in today's money. An investment must have a positive yield of 3.17 % annually just to keep up with inflation!
The broader stock market (S&P500) was down 14% between 1/1/2000 and 12/31/2011. Investors using 'buy and hold' strategies saw negative returns while volatility reached unprecedented levels.
On the other hand, Alternative Investments have seen impressive recent growth. One particular Alternative Investment, Managed Futures has seen its assets under management (AUM) grow an astounding 680% since 2001 to $320 BILLION. The term "managed futures" refers to a 30-year-old industry made up of professional money managers who are known as "Commodity Trading Advisors" (CTAs).
A Commodity Trading Advisor (CTA) is an individual or organization which, for compensation or profit, advises others, directly or indirectly, as to the value of or the advisability of buying or selling futures contracts, commodity options or retail off-exchange foreign exchange (forex) contracts. CTAs are members of the National Futures Association and are registered with the Commodity Futures Trading Commission.
Forex Commodity Trading Advisors (CTAs) trade a variety of the world's currencies for clients through individual Managed Forex accounts. Forex CTAs can either go long or short different currencies, often times moving back and forth between the two. Performance is based on the trading acumen of the CTA, who hopes to profit regardless of which direction the currency being traded moves. As a result, Managed Forex accounts traditionally have low correlations with other asset classes and have become increasingly popular with investors as a way of diversifying their investment portfolios.
