Implementing Futures for Risk Management: A Guided Approach

Topics: ,

Published on October 16, 2023

| 7 min read

David Schofield, President, International Division

For institutional investors, it’s not enough to simply identify effective strategies for managing risk and enhancing returns. The real challenge lies in the implementation. How do you take a theoretical concept and apply it in a practical, effective manner within your portfolio? This is the question we’ll address in this post, focusing on the implementation of futures for risk management.

  1. Understanding Your Objectives

The first step in implementing a futures strategy is to clearly define your investment objectives. These objectives serve as the guiding light for your strategy, shaping its design and execution. They should reflect your desired balance between risk and return and align with the broader goals of your portfolio and organization. What are you trying to achieve? What level of risk are you comfortable with? These questions form the foundation of your investment strategy. In the context of futures, your objectives might include managing equity risk, enhancing returns, or improving portfolio stability. A well-defined set of objectives and a clear understanding of your risk tolerance are the foundation of a successful futures strategy. They provide the direction and boundaries within which the strategy operates, guiding its implementation and ongoing management.

  1. Assessing Risk

Once you’ve defined your objectives, the next step is to assess the risks in your portfolio. Equity risk, the fluctuation in stock prices, is often the most immediate concern for investors. However, changes in interest rates can also significantly impact your portfolio, especially in a volatile rate environment. Credit risk, the possibility of a borrower defaulting on their debt obligations, can pose a threat in times of economic uncertainty. Geopolitical risk, the potential for political events to negatively impact your investments, is another factor that can’t be ignored in today’s interconnected global economy. Futures can be a powerful tool for managing these risks, but they also introduce their own set of risks. Therefore, a comprehensive risk assessment is a critical step in implementing a futures strategy.

  1. Choosing the Right Approach

There are two main ways to implement futures in your portfolio: integrated futures strategies and overlay strategies. Each approach has its own benefits and considerations.

Integrated Approach Overlay Approach
Assess the potential benefits and challenges of integrated futures strategies. Consider their ability to potentially provide direct control over equity risks, increase alpha, enhance governance efficiency, optimize capital efficiency, and potentially offer competitive fees. Engage in in-depth discussions with investment managers experienced in integrated strategies to fully understand their approach and track record. Explore the merits of overlay strategies as a comprehensive risk management tool. Assess their ability to potentially manage portfolio-wide risk, add alpha, facilitate efficient rebalancing, and provide liquidity management solutions. Collaborate with experienced overlay managers who can customize the strategy to your portfolio’s unique risk profile and investment objectives.
  1. Implementing the Strategy

Once you’ve chosen the right approach, the next step is to implement the strategy. Implementing a futures strategy is a multi-faceted process that requires careful planning and execution, including setting up the necessary infrastructure, allocating resources, and establishing governance structures. It’s important to ensure that your governance structure and oversight capabilities align with your chosen strategy. Do you have the necessary expertise with the tools and resources to monitor futures holdings? Can you dedicate a team to continuously monitor and adjust an overlay strategy?

  1. Monitoring and Adjusting the Strategy

The implementation of a futures strategy is not a one-time event but an ongoing process that requires continuous monitoring and adjustment. This is especially crucial for overlay strategies to ensure that the strategy remains aligned with your investment objectives and adapts to changing market conditions.

Monitoring involves tracking the performance of your futures contracts and assessing the overall risk of your portfolio, while adjusting the strategy involves making changes to your futures portfolio based on your monitoring activities. These tasks require specialized expertise; therefore, it’s essential to have a dedicated team or consultant with the necessary skills and experience to manage this process effectively, especially for overlay strategies.

  1. Communicating with Stakeholders

Finally, it’s important to maintain open and transparent communication with all stakeholders, including plan beneficiaries, board members, and investment committee members. It’s important to articulate why this approach aligns with the portfolio’s investment objectives and risk tolerance. This includes explaining how futures can help manage equity risk, enhance returns, and provide downside protection in volatile markets. It’s also key to discuss the potential risks and challenges associated with futures trading and how these are being managed.

Regular updates on the strategy’s performance and risk management outcomes are also vital. These updates should provide a clear picture of how the futures strategy is contributing to the portfolio’s overall performance and whether it’s meeting its risk management objectives.

Implementing futures for risk management is a complex process that requires careful planning, execution, and monitoring. But with the right approach and the right expertise, it can be a powerful tool for managing equity risk and enhancing returns in today’s market dynamics.


This material is for general informational purposes only and should not be construed as investment advice, as an offer or solicitation of an offer to sell or buy, or as an endorsement, recommendation, or sponsorship of any company, security, advisory service, or fund nor does it purport to address the financial objectives or specific investment needs of any individual reader, investor, or organization. This material should not be used as the sole basis for investment decisions. The appropriateness of a particular investment or strategy will depend on an investor’s individual circumstances and objectives.

Nothing in this material shall be deemed to be a direct or indirect provision of investment management services specific to any client requirements. There are numerous other factors related to the markets in general that should be considered before making any investment decision. All content is presented by the date(s) published or indicated only and may be superseded by subsequent market events or other reasons. No forecasts can be guaranteed and there is no guarantee that the information supplied is complete or timely, nor are there any warranties with regard to the results obtained from its use. Intech is the source of data unless otherwise indicated and has reasonable belief to rely on information and data sourced from third parties.

Past performance does not guarantee future results. Investing involves risk, including the possible loss of principal and fluctuation of value. The value of an investment may go down as well as up and you may not get back what you originally invested. Nothing herein is intended to or should be construed as advice. 

Futures are speculative, highly leveraged, and involve a high degree of risk. Volatility increases risk, particularly when trading with leverage. Futures and forward positions cannot always be liquidated at the desired price. Investments can be subject to low liquidity, meaning there may not be a seller or buyer available when the investor desires to invest or divest.

In Australia, this information is issued by Intech Investment Management LLC (Intech) and is intended solely for the use of a wholesale clients as defined in section 761G of the Corporations Act 2001 (Cth) and is not for general public distribution. Intech is permitted to provide certain financial services to wholesale clients pursuant to an exemption from the need to hold an Australian financial services licence under the Corporations Act 2001. Intech is regulated by the United States Securities & Exchange Commission (SEC) under U.S. laws, which differ from Australian laws. By receiving this information, you represent that you are a wholesale client.

Intech is not permitted to offer products and services in all countries and not all products or services are available in all jurisdictions. This material or information contained in it may be restricted by law, may not be reproduced or referred to without express written permission or used in any jurisdiction or circumstance in which its use would be unlawful. Intech is not responsible for any unlawful distribution of this material to any third parties, in whole or in part. The contents of this material have not been approved or endorsed by any regulatory agency.