Comparative Risk Transfer Method
by Richard A. Harrison
It would be nice to get the higher returns of a speculative investment like a managed futures fund, but
they're just too risky." Is that statement familiar? There is a method that allows an investor to move into
these speculative investments with a limited predetermined risk. It also provides several advantages over
the "guaranteed" futures funds. I call it comparative risk transfer, which provides greater liquidity and
control for a very limited amount of risk during the initial phase of the program.
"GUARANTEED" FUTURES FUNDS
Several brokerage firms sell what they refer to as "guaranteed" futures funds, which are usually a
combination of a managed futures fund and zero coupon bonds. The fund will be given some percentage
of the capital (say, 40%) and the remaining capital (60%) goes into five-year zero coupon bonds. If the
managed futures fund loses 50% of its portion (50% x 40% = 20% of total capital), then trading in the
fund will be halted. The zero coupon bonds will continue to maturity and provide a 33% gain on their
portion (33% x 60% = 20% of total capital), canceling the loss from the managed futures fund—thus the
These "guaranteed" futures funds have advantages and disadvantages. The advantage is the opportunity
of increased gain with a managed futures fund with no risk of losing any of the original capital. The
disadvantage is that if the managed futures fund performs below the zero coupon rate of return, then the
investors will make less than they would have with just the bonds.
In addition, if the managed futures fund loses money, then the overall investment could very well
perform below the rate of inflation — not to mention the money will be tied up for five years.