The History of Managed Futures Investments

Just over 100 years ago, the futures market was an investment niche with little to no participation. In today's high paced world, there are now billions of dollars traded every day! How did such a big change occur so quickly? Well, since futures trading and managed futures investments have made such a lasting impact, we will answer this question by outlining the history and evolution of this growing niche.

Before organized futures trading came about, any producer of a commodity (ex. farmer growing wheat or corn) found himself at the mercy of a dealer when it came to selling his product. In all reality, the prices offered for the product could be greatly reduced, and there was truly nothing the farmer could do about it. To add to the problem, seasonal surpluses and shortages would dramatically affect prices even further. These conditions left the agricultural markets volatile for quite some time, hurting everyone from the producer to the end consumer. After years of living with the problems associated with this method of price assessment, both the farmers and buyers agreed, it was time for a change.

In 1878, the first central dealing facility was opened in Chicago, Illinois, providing a place for farmers and buyers to deal in "spot grain", (i.e. immediately deliver their wheat crop for a cash settlement). Shortly after, futures trading evolved as farmers and buyers committed to buying and selling future exchanges of the commodity at predefined prices. For example, a buyer would agree to buy 5,000 bushels of a certain quality of wheat from a farmer in June 2009, for a price that was agreed upon in December 2008. In this scenario, the farmer knew how much they would be paid come June 2009, and the buyer knew their costs to attain the product. Needless to say, these agreements became very important, allowing both parties to meet demand, define risk, and assess their profit margins upfront.

From the time the first "dealing facility" was created until the early 1970's, futures markets grew rather slowly. During that time, the futures markets were only composed of a few farm products, and customers who wanted to hedge the purchase or sale of one of those commodities. Since there were very few options to choose from, many still used informal forward contracts, not recognizing the benefits that the futures markets could provide. For several years this continued until the government recognized the economic benefits of futures trading, and in response, added a large number of newly "tradable" futures to the market.

When commodities like metals, energies, foods, industrials, stocks, indices, and interest-rate instruments became tradable, the futures market started to grow at a much faster pace! No longer were there a few basic options to choose from, now investors could trade commodities like crude oil, gold, platinum, coffee, soybeans, cattle, and most importantly, stocks and indices such as the Dow Jones, Nasdaq, and S&P 500 futures. This change created opportunities for those interested in "hedging" or "speculating" in these new markets, which as we will explain, became immensely popular all over the world.

Before the expansion of the futures/commodities markets, hedging was the primary goal for both the buyers and sellers of farm products. At the time, hedging provided a great opportunity for both parties to define their risk, as well as their expected reward. Once the new "tradable" commodities were implemented, the idea of hedging in the futures market started to spread, raising the eyebrows of many savvy investors and big businesses. As a result, with almost every major commodity now being actively traded, the big players had no choice but to participate to help prevent price instability, and define profit projections. With this monumental change, airlines could now hedge their gas supply, farmers could define their profit before selling their harvest, jewelers could define the cost of their gold, and more.

In addition to the new options for aspiring "hedgers", there were huge opportunities for those with a higher risk tolerance. Noticing the profit potential, many traders started to "speculate" on futures prices, profiting from the price movement of various commodities. For example, a trader would buy ("go long"), and then if a commodity price went up, they could close the trade and sell at a higher price, usually producing huge profit. Since the markets were highly leveraged, speculating in futures became very common, and many started to flood the market attempting to make high yields from price movement.

By the end of the 1980's, a number of investors had now caught on to the futures trading movement. With over $5 Billion dollars of money invested in managed futures funds, many of the remaining savvy investors had no choice but to acknowledge the trend, and jump on the band wagon. This rapid growth of managed futures investments continued until the new millennium hit, and then things really took off. By 2004, the amount of money invested in managed futures had increased to over $130.9 Billion dollars, growing over 2600% in just 15 years. With the increased media attention we have had since then, from the crude oil bubble of 2008 to $1000 an oz. gold in 2009, the amount of money invested in managed futures has become even far greater today!

As you can see, commodities/futures trading is one of the fastest growing markets in the investment world, and it is far from its peak. Though many may think of it as a trader's market, it is critically important to the efficiency and price determination of the world economy. Think about it, without futures trading you may not be able to get that bread and milk for as cheap you do, and in fact, many of the common commodities you take for granted may only exist amongst the rich! All in all, futures trading fulfills an important role in the world, but most importantly for you, it can serve as your personal ticket to wealth and success.

We hope this article has helped you understand and appreciate the role of futures trading, and managed futures investments. Take a few more minutes and look below for some of our related articles to learn more about the exciting world of futures investing.

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