Managed Futures
Also written Managed Futures Strategy
A strategy run by Commodity Trading Advisors that trades commodity, equity and currency futures using systematic or discretionary methods to profit from short-term mispricing.
In plain language
In the US, some fund managers register as a Commodity Trading Advisor, or CTA. A CTA trades futures contracts for clients. The strategy it runs has a name: Managed Futures.
A Managed Futures strategy trades commodity futures, equity futures and currency futures. Some CTAs use a systematic style. An algorithm tracks price moves across markets and picks the trade. Other CTAs use a discretionary style instead. Here, an experienced manager makes the call, not a formula.
Either way, the goal is the same. The fund wants to profit from short-term mispricing between asset classes and derivative contracts.
How it works
The workbook places Managed Futures in its overview of global hedge fund strategies, alongside Fund of Funds and Multi-Strategy Funds as strategies common in North American and European markets respectively.
Systematic Investment Strategies use algorithms fed with price data and pre-defined objectives to take exposures in futures markets across geographies, without a human deciding each trade.
Discretionary Investment Strategies rely instead on the investment manager's own judgement and expertise to decide the trade.
Indian Category III AIFs following a comparable strategy can invest in all commodity derivatives products traded on India's commodity derivatives exchanges, subject to a cap of 10% of investable funds in one underlying commodity, and to SEBI's reporting requirements for such positions.
A worked example
A Category III AIF, Nilgiri Systematic Fund, runs a Managed Futures-style strategy across commodities. Its algorithm flags a short-term mispricing between crude oil futures and a related currency future, and takes offsetting positions to capture the gap before it closes.
The fund's total investable funds are Rs 200 crore. Its exposure to crude oil futures, as the single underlying commodity, is capped at:
10% x Rs 200 crore = Rs 20 crore
A rival fund in the same space, Malabar Discretionary Fund, runs the same kind of trade, but the decision to enter and exit is made by its head trader's own reading of the market, not an algorithm — a discretionary approach to the same Managed Futures idea.
Why NISM asks about it
Chapter 3, section 3.6 (Hedge Funds: Global Market Overview), introduces CTAs and the Managed Futures strategy alongside Fund of Funds and Multi-Strategy Funds, and distinguishes systematic from discretionary methods. The same section carries the 10% single-commodity investment cap for Indian Category III AIFs. Expect a question distinguishing systematic from discretionary Managed Futures, and recall of the CTA-NFA registration link.
Common exam traps
- A CTA registers with the National Futures Association (NFA) in the USA — this is a US regulatory reference the workbook carries over, not an Indian requirement.
- Systematic uses algorithms; discretionary uses the manager's judgement. Do not swap the two.
- Managed Futures trades commodity, equity and currency futures — it is not limited to commodities alone.
- The 10% single-commodity cap applies to Indian Category III AIFs' investable funds, separate from the US CTA/NFA framework the term itself comes from.
Where this is taught
Free preparation for NISM Series XIX-BRelated terms
- Category III AIFThe AIF category for funds running diverse or complex trading strategies with leverage — hedge funds and their kin — and the only category denied tax pass-through status.
- Commodity OptionsAn options contract in which the underlying is the right to enter a commodity futures contract — a second-order derivative that a Category III AIF may trade up to 10% of its funds in one commodity.
- Commodity Trading AdvisorA category of fund manager, common in North American hedge fund markets, that runs a "Managed Futures" strategy in commodity, equity and currency futures using systematic or discretionary methods.