One of the comments that came up recently in an attack on managed futures was that futures trading is a zero sum game. This raised a couple of eyebrows among our readers, so we thought we’d take a moment to explain.
Futures trading is a zero sum game in so far as there is one buyer for every one seller of every futures contract. If you’re trading futures on your own, this fact can be very unnerving – as it can mean that you, in effect, need to be smarter, better, or more lucky than the person on the other side of the trade you just made in order to make money. With billion dollar hedge funds and trading desks at banks like Goldman Sachs (which have gone entire quarters, or 3 months, without a losing trading day big players in futures markets) the odds are that you, as an individual investor, are going to get it wrong more often than not.
It’s like another zero sum game – poker. In a poker game, you are not betting against the house or playing the odds, you are playing against the other players at the table. Would you be willing to sit down at a game in which all of the other players are professionals with bankrolls hundreds of times yours? We sure wouldn’t.
That’s why we’re such big advocates of managed futures. With the futures market a zero sum game, we would rather put money with the professionals at the table, rather than compete with them head on. Someone is going to win, and someone is going to lose (zero sum), and we prefer to go with a professional in that contest.
Managers are experienced and informed, and are able to operate with the support of years of data and complex algorithms to help them ascertain the best moves at the right moments. That doesn’t mean they won’t get it wrong, too. They will, and the risk of loss is as great. However, in our opinion, managed futures is the better option for those seeking access to this arena while minimizing risk.
To better clarify how establishing a position operates, the following diagram gives a basic explanation of what happens when someone decides they want to buy (go long) or sell (go short) a position.