For many, 2008 was a wake-up year in terms of portfolio diversification. Equities stumbled badly, housing cratered and most equity-based alternative investments underperformed.
What did perform well as an asset class was managed futures. Specifically, trend-following strategies that tend to exploit market dislocations for profit, the type of dislocation that causes most other investments to lose big.
Not only was 2008 one of the best years for managed futures (the Barclay CTA Index was up more than 14%), it did it while nearly everything else suffered. It performed its function as an alternative investment well and showed what many inside the industry believed and some research has indicated: That managed futures tend to be non-correlated to equities in good times and negatively correlated in bad times (see "What you are missing"). More importantly, it caused institutional and retail investors alike to ask: "Why didn’t I have this in my portfolio?"
The answer to that question is different depending on who is asking. If you are a retail investor, chances are you had little opportunity to access it.
Commodity trading advisors (CTAs) have been around since the 1970s; in the early days many of those managers were also commodity pool operators (CPOs) who offered public commodity pools to retail investors. But as the industry evolved, retail futures product regulation became tougher — it was easier to offer products with high minimums to high-net-worth and institutional investors — and fewer public pools were offered. The public certainly couldn’t access managed futures as easily as they could broad-based mutual funds that can be marketed to the general public and are much less expensive and burdensome to operate.
"Public commodity pools are one of the most heavily regulated security offerings," says Campbell & Company General Counsel Tom Lloyd. Not only are they regulated by the Commodity Futures Trading Commission (CFTC) and National Futures Assocation (NFA), but also the Securities and Exchange Commision (SEC), Finra and all 50 states.
Public pools also are deemed Direct Participation Programs by FINRA, so the trail commissions selling agents can charge for them are capped at 10%.