Academic studies have found that managed futures often diversify portfolios due to low correlations with traditional assets, but what has limited their effectiveness?

Academic studies have found that managed futures often diversify portfolios due to low correlations with traditional assets, but what has limited their effectiveness?

• A. Low turnover
• B. Low correlations
• C. High fees
• D. High correlations

Answer: (C)

Managed futures can help diversify a portfolio because their returns often move independently of traditional assets like stocks and bonds. That low correlation means they can reduce overall portfolio risk without necessarily sacrificing returns in many market environments. However, the benefit is frequently limited by the cost side. The fee structure for managed futures—often including both ongoing management fees and performance (incentive) fees—can be quite high. Those costs erode net returns, which can outweigh the diversification gains, especially when futures strategies produce only modest absolute returns. So, despite their diversification potential, high fees tend to be the main factor limiting their overall effectiveness.

Managed futures can help diversify a portfolio because their returns often move independently of traditional assets like stocks and bonds. That low correlation means they can reduce overall portfolio risk without necessarily sacrificing returns in many market environments. However, the benefit is frequently limited by the cost side. The fee structure for managed futures—often including both ongoing management fees and performance (incentive) fees—can be quite high. Those costs erode net returns, which can outweigh the diversification gains, especially when futures strategies produce only modest absolute returns. So, despite their diversification potential, high fees tend to be the main factor limiting their overall effectiveness.