Understanding The Managed Futures Revolution!

Vision L. P. ("Vision") is one of the largest FCM providers of Introducing Broker Services in the industry and ranked by Futures Magazine as within the top fifty largest FCMs in the U.S. Vision is a registered FCM with the CFTC as well as a Commodity Pool Operator. Vision is a member of the National Futures Association. Howard Rothman, the President of Vision, was elected in January 1990 by the Introducing Broker membership category to serve on the NFA Board of Directors, and served three consecutive terms. Furthermore, Mr. Rothman is currently a member of the Law and Compliance Division of the Futures Industry Association, of which Vision is a regular member. He was also a Director and Founding Member of the National Introducing Brokers Association.

Before we begin, please be advised that the risk of loss exists in futures investments and that past performance is not necessarily indicative of future results.

Only gamblers and manipulators once ventured into this market. That's what they said about the stock market one hundred years ago! Even as late as 1979, after the Dow plunged 70% to 80% in value, from 1968 through 1974, a Business Week cover proclaimed the death of equities. Needless to say, the transformation of the public's attitude concerning stocks has been revolutionary and has come full circle, from outright revulsion to full embrace.

Many believe the revolutionary change in the public's perception and participation in stocks can be directly attributed to investors becoming better informed and leaving their investing decisions to market professionals.

Like stocks, investors are being won over to futures by becoming better informed and leaving their investment decisions to professional management.

Studies show that the majority of individuals who trade on their own do lose. However, there is a logical reason for the amateur losses. If a non-professional attempted to practice medicine or law, he or she probably would perform quite poorly, similar to many nonprofessional traders. From monitoring amateurs who trade futures on their own, we have observed most trade on rumors, tips from friends, gut feelings, part-time research, and for the fun of it. We believe most amateurs who trade on their own are making a very serious error in judgment. They are not professionals and, in our opinion, are doomed to fail even before they begin, just like a non-professional would be if he or she attempted a complicated medical operation. In most professions, there is a vast difference in performance between amateurs and professionals. This is especially applicable to futures trading. Doesn't it stand to reason that successful trading requires full-time professional preparation, participation, study, focus, and natural aptitude? It should be no surprise that in the highly complex and challenging field of commodity trading that the vast majority of non-professional or amateur traders do lose.

Studies have shown that professional Commodity Trading Advisors do experience an appreciably higher success ratethan the individual amateur trader. The fact is, there are numerous Commodity Trading Advisors with highly attractive returns achieved through prudent money management!

While the attractive returns possible is one main reason many investors participate, another very important reason for participating has its foundation in Modern Portfolio Theory. The premise of Modern Portfolio Theory is the risk of an investment can be reduced and performance increased by holding a number of uncorrelated investments in different asset classes, which do not move in lockstep with each other. This product fits the description quite nicely. Futures are a distinct asset class different from securities. In fact, studies have shown the correlation between commodities and stocks and bonds to be practically zero, making them an ideal asset class with which to properly diversify an investment portfolio!

Past performance is not necessarily indicative of future results.
The risk of loss exists in futures trading.

Independent studies and actual experience have shown futures can increase performance and balance the risk in an overall portfolio. Simply put, they can potentially be the ideal hedge for stocks and bonds! These studies were conducted to specifically examine the effect of managed futures in an overall portfolio.

Their ability to enhance returns in an overall stock and bond portfolio was documented by the prestigious investment banking firm of Goldman Sachs. In a study Goldman Sachs conducted covering a twenty-five-year period, they concluded that by allocating only 10% of a securities portfolio to commodities, investors can vastly improve their performance. Based on its research, Goldman Sachs recommends that futures be included in their clients' investment portfolios.

Another study, published by the Chicago Mercantile Exchange, states, "Portfolios with as much as 20% of assets in managed futures yielded up to 50% more, with comparable risk, than portfolios of stocks and bonds alone.

Now here’s a study which should really open up your eyes. Listen carefully to this: The prominent Chicago Board of Trade shows in their booklet, "Portfolio Diversification Opportunities," a chart indicating a portfolio with the greatest risk and least amount of returns comprised 55% stocks, 45% bonds, and 0% managed futures. Now what was the portfolio which showed the greatest returns and least risk? It was the portfolio comprised of 45% stocks, 35% bonds, and 20% in managed futures. As you can see, this study supports the one published by the Chicago Mercantile Exchange which concluded portfolios with as much as 20% of its assets in managed futures yielded up to 50% more returns.

Additional evidence of the value of futures in a stock portfolio can be seen when comparing four of the major advances and declines in the S&P 500 with the corresponding futures performances over the past twenty-five years. During each advance in the S&P, futures were positive. However, during all of the S&P's largest declines, they were also positive. In fact, in all but one decline in the S&P, the advance in futures completely offset the loss in the S&P 500!

You can pictorially see these studies in graph form and detailed in Vision's highly informative brochure, Managed Futures, A Balanced Approach. Ask your us for your free copy.

We believe the value of including futures in an overall investment portfolio can be best summed up by the Chief Executive Officer of Harvard Management Company, Jack Meyer, who manages Harvard University's huge pension fund. He was quoted in a November 1996 Wall Street Journal article as saying, "Holding commodities offers protection against the ups and downs of stocks and bonds." Referring to commodities, he added, "They're the most diversifying asset in the portfolio."

In a December 2, 1996, article in Baron's, the newspaper had the following to say about Harvard Management Company's Chief Executive Officer:

"In the months after arriving from the Rockefeller Foundation back in 1990, one of his biggest decisions was to settle on diversification as a key theme. Relying on techniques of modern portfolio theory to get the best returns with lowest level of risk, Harvard needed to cut its exposure to publicly traded U.S stocks and bonds, and increase its investments in foreign stocks, commodities and private companies. The result: Right now the Harvard endowment has about only half its portfolio in U.S. stocks and bonds, versus about 75% for the typical university endowment."

"The benefits of diversification are indisputable. Diversification rules. It's powerful and our portfolio is a good deal less risky than the S&P 500."

Other examples of the major institutions incorporating managed futures in diversifying their portfolios comes from the city of Detroit and the San Diego retirement systems. Detroit’s retirement system has been using managed futrues in their asset allocation for 11 years. The retirement system’s investment analyst, Richard Huddleston, says, "We view managed futures as a legitimate asset class and therefore it belongs in our asset allocation." The San Diego County Employees Retirement System has 5% of its assets in managed futures.

Past performance is not necessarily indicative of future results.
The risk of loss exists in futures trading.

Many believe, due to practically a zero correlation with stocks, it is the ideal asset class to diversify an investor's portfolio. Let's review supporting evidence as to why.

The non-correlation between stocks and commodities was dramatically highlighted during 1973 and 1974 where stocks dropped 41% and commodity prices soared 114%. During the S&P's two worst declines during the past decade, managed futures recorded net profits. Also during September to November 1987, when the S&P 500 fell nearly 30 percent, managed futures rose 10%. Further support of futures non-correlation with stocks can be seen during the Gulf War when the S&P fell 15% and managed futures rose 19%.

During the third quarter of 1998, when the average NASDAQ and New York Stock Exhcnage stocks were down approximately 50% from their highs and the Russell 2000 and S&P 500 were down, respectively, 19% and 14%; the Managed Account Report Trading Advisor Qualified Universe Index was up!

More recently, in November 2000, when the average diversified fund and technoogy fund lost 15.6% and 26%, respectively, the Managed Account Report Trading Advisor Qualified Universe Index was up 5.6%. The instances wherein commodities have outperformed stocks have been isolated and do not necessarily reflect what usually happens in these markets. Please be advised that this in no way indicates that they will outperform the stock market in the future.

We ask, how can any open-minded investor, with all this compelling research as to its attractiveness not see the wisdom of diversifying at least a small portion of their portfolio with managed futures? With all the overwhelming evidence, the walls built of misconceptions and myths are crumbling. Investors are learning the differences between amateur and professional traders. They are reading the research and documentation, discussing and confirming the multiple benefits of participating. With investors becoming better informed, the false and misleading image of the high rolling commodity trader, as portrayed by the actor Eddie Murphy in the movie "Trading Places," is being replaced with facts and the realization that performance among many professional CTAs have been highly attractive and, most importantly, achieved through prudent money management!

More and more informed investors are starting to realize professionally managed futures, on its own, as a standalone investment can be very attractive. But just as attractive is the fact that managed futures can be the ideal asset class to add profound diversification to a stock and bond portfolio, potentially increasing performance and reducing risk! Please note that regardless of whether you use them as a stand alone investment or to deversify your portfolio, there is substantial risk of loss and you may lose more than your initial investment. With practically a zero correlation to stocks and bonds, according to the definition of Modern Portfolio Theory, managed futures are well suited to diversify an investor's overall portfolio.

Testament to the benefits of futures' diversification was again in evidence in 2000. Many investors, in direct violation of modern portfolio theory espoused by the likes of Harvard Management's CEO Jack Meyers and others, "diversified" their portfolios between sectors, corporate bonds, in the major stock indices, and in overseas stocks. Unfortunately, these investments are all part of the same asset class and don't move independent of one another. In fact, they generally move in tandem.

This is precisely what occurred in 2000. Those placing all their investment eggs in a single basket found the year 2000 to be a profoundly painful one. The average science and technology fund fell 32%. Internet funds, of course, were among those hardest hit. The top three funds of 1999 were among the major disappointments of 2000, losing 65%, 51%, and 57%, respectively. The average telecom fund lost 34%. Foreign funds were down an average 15%. The major stock indices were also deflated, led by Nasdaq's 39% falloff. Those trying to "diversify" into corporate bonds were not exempt. The Heartland High Yield Municipal Fund, for example lost 70% in a single day!

On the other hand, the major futures indices were up in 2000. The Dow Jones AIG Commodity Index, CRB Commodity Index, and Goldman Sachs Commodity Index were up 24%, 11%, and 32%, respectively. Past performance is not necessarily indicative of future results. The risk of loss exists in futures trading.

You should now better understand why Harvard Management's Meyers said of the university's endowment fund, "Commodities are the most diversifying part!"

It's no wonder participation has substantially increased. And for good reason. Not only can they be an attractive stand alone investment, providing the opportunity to capitalize on both bear as well as bull markets, but also, so to speak, just what the doctor ordered to help add profound diversification to an overall portfolio!

Past performance is not necessarily indicative of future results.
The risk of loss exists in futures trading.

The buzz word and main focus of investors today, we believe, is diversification through proper asset allocation. In achieving this goal, with practically a zero correlation to stocks, profesionally managed futures can prove to be invaluable.

Does your portfolio consist primarily of stocks, bonds, mutual funds, and utility stocks? If so, you are in direct opposition to Modern Portfolio Theory. You are invested in vehicles which generally move in the same direction! Do you have an investment strategy to protect your portfolio from adverse market reactions? If you don't, you probably suffered losses in 2000 and once again may be at exreme risk. Now, before it’s too late, we advise in the strongest of terms to follow the lead of so many other informed investors who are diversifying their portfolios with Managed Futures!

Rest assured, Vision has done its due diligence prior to choosing their recommended CTAs. Among other things, Vision audits each CTA’s performance record to confirm its accuracy as presented in each trading advisor’s disclosure document. A Vision-affiliated Managed Futures Specialist can help you decide which CTA is best for you based on your investment goals, affordability, and suitability.

For a detailed description of Vision's CTA selection process and other highly informative data, please make sure you ask your broker for a free copy of the 2001 edition of "Managed Futures, A Balanced Approach."

We hope we've been informative and provided you a better "Understanding of the Managed Futures Revolution." Have a great day and the best of luck in your investment endeavors.

*Studies have shown that professional CTAs do experience returns greater than the individual investor. Nevertheless, the risk of loss exists in futures trading and past results are not necessarily indicative of future results regardless of who is managing your money. Before investing in any program, you should carefully review the CTA's disclosure document.

Copyright: 2001 by Vision Limited Partnership. All rights reserved. This material may not be used or be reproduced in any form, whatsoever, by mechanical or electronic means or otherwise, without written consent of Vision Limited Partnership. Violations will be subject to prosecution.
Past performance is not necessarily indicative of future results.
The risk of loss exists in futures trading.