Investing is full of concepts. The inquisitive twenty-first century investor faces a virtual plethora of firms, services, brokers, instruments, and strategies coming at the speed of light in the quest for obtaining returns on available assets. It can be, and often is, overwhelming.

An investor is a builder. Over time the goal is to construct a portfolio that obtains what an investor deems a reasonable annual return for those assets that can be committed. Typically, either the investor personally constructs his or her “sword” of investments or the framework is “forged” by a professional financial planner. It usually consists of percentages in a mixed bag of stocks, mutual funds, CDs, bonds, real estate (REITS) and money markets. Within each of these markets are wide varieties of levels for investment aggressiveness or growth. One of the investment devices commonly overlooked by planners, investors and corporations are managed futures accounts.

Why is the inclusion of a managed futures account so critical to a well constructed and balanced “sword?” Well, there are a few generally accepted principles behind the inclusion of a managed futures account into a portfolio (of over $150K net worth) under the Modern Portfolio Theory.

• Low correlation’s to defined stock market risk
• Allows access to truly global markets
• Reduces standard portfolio deviation risk ratios
• Allows access to a broad level of truly diversified markets

Many formal studies have been conducted since the early 1980’s when the managed futures industry started to today where now over 40 billion dollars are invested in managed futures products. Almost all the studies tend to point to an increased overall benefit with regard to exposure to profitable opportunities due to leverage, diversification of existing assets, and the establishment of non correlating portfolio risk. Futures tend to do well in declining economic cycles, hence hedging overall portfolio risk.

But who really uses them? Individual investors, corporations, banks, pension funds, and equity trading pools and funds all do. Take a moment and read the fine print in your mutual fund or money market prospectus. The truth is that all investors and consumers are involved in futures markets continuously; they just do not realize to what degree. For the exceptionally wealthy, hedge funds fill this role. However with $500,000+ minimums, most investors are excluded from that element of diversification.

Now back to a conceptual way of looking at things. If your investment portfolio is akin to a sword, the investor decides the basic size and composition of the sword with assistance from financial planners. The most conservative elements make up the bulk of the shaft and handle, and the more aggressive the investment, the closer to the tip and the edge they are. Quite simply put, managed futures are on one edge of the sword (Tech funds may be on the other edge). Though it only takes up a small percentage of the entire sword (4-10 percent), it does a lot of work relative to the overall size of the sword and, as on a real sword, usually does the bulk of the aggressive work (annualized return) on the decisive back swing.

So why aren’t managed futures on the tip of everyone’s tongue and sword? Mostly because it takes a good length of time, money and market action for an individual investor to realize that something may be missing. First, in the last eight years of a bull stock market, this may not have been too apparent. Second, it is generally in times of inflationary economies that managed futures accounts tend to pull in larger annualized returns, and so until recently, they have not been at the forefront of annual returns or investors attention.

But in the present day of $32.00 a barrel for crude oil, $1.50 a gallon heating oil and 74 cents a therm for natural gas, the time may be upon investors to examine managed futures now. Selection of financial instruments is never easy for an investor. Looking at the inclusion of managed futures into a portfolio is not an easy task, and there are a number of key factors to consider. Realizing that a non-systemic risk counter balance is necessary for true portfolio diversification can be the first step. Are you ready for that step?

(Editor’s Note: Christopher Reilly is president of Olympic Asset Management, a Port Orchard firm that offers a variety of services to investors including individual and corporate managed futures accounts, pension funds management, corporate risk management and retail commodity trading. He may be reached at (360) 895-1489 or Olyasset@sinclair.net, www.managefutures.com.).