Today, a variety of academic research
and evidence demonstrates the potential benefit of
incorporating managed futures to create better balance
to a stock and bond portfolio.
Although futures investments involve
substantial risk and are not suitable for everyone,
the general conclusion is that diversification of
non correlated asset classes, such as the introduction
of managed futures to an investment portfolio, can
both reduce portfolio risk and enhance overall portfolio
performance.
Modern
Portfolio Theory (MPT)
MPT was introduced by economist Harry
Markowitz with his paper “Portfolio Selection”
which appeared in the 1952 Journal of Finance.
In 1990, Mr. Markowitz, with William
F. Sharpe, and Merton H. Miller, won the Nobel Prize
for their contributions to financial economics. Their
contributions, in fact, were what started financial
economics as a separate field of study.
Economists had long understood the
common sense of diversifying a portfolio. But Markowitz
showed how to measure the risk of various securities
and how to combine them in a portfolio to get the
maximum return for a given risk.
Portfolio
Diversification
The concept of Modern Portfolio Theory
was further advanced by the work of Harvard professor
Dr. John Lintner in his 1983 study, “The Potential
Role of Managed Commodity - Financial Futures Accounts
in Portfolios of Stocks and Bonds”.
His conclusions stated, “...The
combined portfolios of stocks (or stocks and bonds)
after including judicious investments in appropriately
selected sub-portfolios of investments in managed
futures accounts...show substantially less risk at
every possible level of expected return than portfolios
of stocks (or stocks and bonds) alone”.
The general conclusion is that diversification
of non-correlated asset classes can reduce overall
portfolio volatility.
