Often, we hear that investors are nervous about the use futures contracts in investment portfolios.  We are perplexed by this given this is a very powerful investment tool that is very common in institutional portfolios.

Futures have many benefits, including transparency and liquidity, but perhaps the most important is the cash efficiency aspect. Given futures have inherent leverage (the investor puts up a small percentage of the contract's value on margin), the cash can be used for different purposes, to generate income or some other uncorrelated investment. As such, you have more flexibility and get to decide how to deploy the cash.

The ability to create leverage with futures can be a double-edged sword, as one potentially has the ability to take on more risk than one can handle. But this is really a risk management issue, and as long as one understands that, it is very easy to keep the risk in check. Moreover, there are professional managers that focus on managing assets using futures (we know a couple!).

Regardless of whether you fully fund an investment, or simply fund the margin (embracing the leverage), if the position moves against you, you need to eat the loss. In the case of a fully funded investment, you put up all the cash at the outset. In the case of an investment funded on margin, you need to transfer cash to the broker to make up for any losses within a short time frame (the dreaded margin call!).

We like to think about the flexibility that futures provide as cash efficiency.  If you don't use all the capital to fund the positions held in futures, you can use that capital for other purposes.  For example, you could use some of the cash to fund exposure to the stock market, fixed income, or even alternatives like real estate, private equity or infrastructure many of which take more capital (and do not have the same free leverage available).  Pension funds and other institutional investors have understood this benefit for decades.  Many of these are the most conservative of investors, protecting pensions and endowments for teachers, police, universities. Are they interested in adding undue risk? No. They are simply using their capital efficiently so they can spread the risk and diversify their portfolio most efficiently. 

For Auspice, the margin requirement for our core positions in our protective CTA style funds is typically less than 10% of the total notional amount of the investment.  For investors that run managed accounts with us, this allows them to deploy their unutilized cash into other diversifying investments or to earn interest or income.  For investors in co-mingled funds, we fund the margin and keep the remaining cash in T-bills or some other low risk interest generating account. This is fine but we have spent a lot of time thinking about how we could deploy the unutilized cash in a more productive way and how we could manage this better for investors and now we think we have found the right way to do it.

This fall we are launching a new fund, Auspice One Fund, that takes advantage of the cash efficiency and diversification of our futures strategies along with the upside opportunity of global equity, the diversification of fixed income and gold. It deploys the capital more efficiently all while embracing the tools we have employed for over 14 years. Our expertise in trend-following, risk management, and disciplined capital allocation remains the core of this opportunity. 

 If you’re interested, please reach out. 

Disclaimer below

 IMPORTANT DISCLAIMERS AND NOTES

Futures trading is speculative and is not suitable for all customers. Past results are not necessarily indicative of future results. This document is for information purposes only and should not be construed as an offer, recommendation or solicitation to conclude a transaction and should not be treated as giving investment advice. Auspice Capital Advisors Ltd. makes no representation or warranty relating to any information herein, which is derived from independent sources. No securities regulatory authority has expressed an opinion about the securities offered herein and it is an offence to claim otherwise.

QUALIFIED INVESTORS

For U.S. investors, any reference to the Auspice Diversified Strategy or Program, “ADP”, is only available to Qualified Eligible Persons “QEP’s” as defined by CFTC Regulation 4.7.

For Canadian investors, any reference to the Auspice Diversified Strategy or Program, “ADP”, is only available to “Accredited Investors” as defined by CSA NI 45-106.