One of the key views of Modern Portfolio Theory, as developed by the Nobel Prize economist Dr. Harry M. Markowitz, is that more efficient investment portfolios can be created by diversifying among asset classes with low to negative correlations. The primary benefit of adding managed futures to a diversified investment portfolio is that it may decrease portfolio volatility risk. This risk-reduction contribution to the portfolio is possible because of the low to slightly negative correlation of managed futures with equities and bonds.
While managed futures can decrease portfolio risk, they can also potentially enhance overall portfolio performance. This is supported by various academic research studies, beginning with the landmark study of Dr. John Lintner of Harvard University, in which he wrote that "the combined portfolios of stocks (or stocks and bonds) after including judicious investments in leveraged managed futures accounts show substantially less risk at every possible level of expected return than portfolios of stocks (or stocks and bonds) alone." When observed as an independent investment, managed futures have compared favorably with U.S. stocks and bonds over the last twenty years.
Because of the diverse investment vehicles managed futures trading advisors participate in, the advisors have the ability to profit in various economic conditions. Managed futures trading advisors can take advantage of price trends. They can buy futures positions in anticipation of a rising market or sell futures positions if they anticipate a falling market. For example, during periods of hyperinflation, hard commodities such as gold, silver, oil, grains, and livestock have tended to do well, as do the major world currencies. During deflationary times, futures provide an opportunity to profit by selling into a falling market with the expectation of buying, or closing out the position, at a lower price. Trading advisors can even use sophisticated strategies that use a mix of futures and options on futures contracts that allow for profit potential in flat or neutral markets.
The establishment of global futures exchanges and the accompanying increase in actively traded futures contracts, have allowed trading advisors to diversify their portfolios by geography as well as by individual commodity market. For example, managed futures can participate in at least 150 different markets worldwide, including stock indexes, financial instruments, agricultural and tropical products, precious and nonferrous metals, currencies, and energy products. Trading advisors have many possible opportunities to profit from the broad array of non-correlated markets.