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The Endowment Model: Managed Futures

by AOG Wealth Management

Managed Futures are a solid part of all investment portfolios most especially those dedicated to implementing the endowment strategy.  The key to a successful endowment model is to populate the portfolio with income generating assets that have little to no correlation to each other.   When you incorporate assets into a portfolio that are not correlated to one another (assets that do not move in the same direction to the same degree at the same time) you reduce the overall volatility of a portfolio, while maintaining or increasing overall returns.  Managed Futures are the posterchild for non-correlation to other established asset classes.

Initially, managed futures strategies focused solely on metals and grain futures.  They became commonplace in the 1970’s after futures exchanges expanded to include other types of futures contracts such as commodities, equities, currencies, interest rates and government bond futures.

The primary driver of most managed futures strategies is trend-following or momentum-investing; that is, buying assets that are rising and selling assets that are declining.  This strategy is most successful in either extremely strong or extremely weak markets.  We typically see managed futures perform well when most traditional asset classes are suffering.  Historically, managed futures have displayed virtually no correlation to the S&P 500 Index or the Barclays Capital Aggregate Bond Index, offering strong portfolio diversification potential.

The prerequisite for positive performance for managed futures is a sustained and consistent trend in market futures prices.   They tend not to perform as well in other market conditions such as times when markets are choppy and directionless.  These conditions produce negative returns for most managed futures strategies.

The popularity of the asset class increased as a result of its strong performance during the dot-com collapse of 2000-2002 and the 2008 financial crisis.  This is why we liken managed futures to an insurance policy.  When markets are at their absolute worst, managed futures are arguably at their best.

Securities offered through Kalos Capital, Inc. located at 11525 Park Woods Circle, Alpharetta, Georgia 30005 and/or TD Ameritrade Institutional Services located at 7801 Mesquite Bend Drive, Suite 112, Irving, TX 75063-6043. Investment advisory services offered through AOG Wealth Management, Inc. AOG Wealth Management, Inc. is neither an affiliate nor subsidiary of either Kalos Capital, Inc. or TD Ameritrade Institutional Services.

There is no standard or exact definition of the Endowment Model.  Portfolio design, specific investments and ultimately performance vary considerably among endowments and investors.  There are material differences between the terms under which endowments and individuals can invest in alternative investments. Kalos does not claim that any investor will achieve the same result as any endowment, institution, or other investor. Kalos’ Investment Advisor Representatives have a conflict of interest when they recommend securities where they can earn a commission as Registered Representatives of Kalos Capital but do not earn both advisory fees and brokerage commissions on the same assets.

Trading managed futures and option transactions both involve a substantial amount risk and loss of principal and is generally deemed unsuitable for all investors as there is no guarantee of profit. Past performance is not indicative of future results and in some cases managed commodity accounts are subject to higher charges for management and advisory fees. In some cases, it may be necessary to make substantial trading profits to avoid depletion or exhaustion of assets and under certain market conditions; it may be difficult to liquidate positions. All investors must meet eligibility requirements as that term is defined by CFTC regulation 4.7 and considered by the regulations to be sophisticated enough to understand the risks and be able to interpret the accuracy and completeness of any performance information.

An investment in the interests of the Trust involves certain risks, including tax risks, general real estate risks, risks relating to the financing, risks relating to the ownership and management of the Property, risks relating to liquidity and risks relating to the Trust structure. There is no guarantee that Investors will receive distributions or a return of their capital. This material is neither an offer to sell, nor a solicitation to buy a security, which can be made only by the Memorandum and sold only by broker/dealers authorized to do so. All potential Investors must read the Memorandum, and no person may invest without acknowledging receipt and complete review of the Memorandum. These securities have not been registered under the Securities Act of 1933 and are only made available to individual who meet certain minimum requirements as an accredited investor under SEC Rule 501(a). Investors that do not meet these minimum standards are not eligible to participate in Regulation D offerings.

Category: Investment Management