The potentially enormous profits from futures can tempt investors. Buyers only need to put up about 5 to 10 percent of the price of a futures contract. In contrast, at least 50 percent margin is required for buying stocks.
But futures are much riskier than stocks. The markets can turn quickly and losses can exceed the 5 to 10 percent margin, which means that an investor can lose more than his entire investment.
"The average retail client does not have enough experience to handle the volatility and leverage," said Richard A. Pike, director of managed investments at Elders Futures Inc., in New York. "Most guys who try to do it get an expensive education."
Commodity funds offer a somewhat safer alternative. The funds, which are limited partnerships, are professionally managed and are set up so that losses cannot exceed a person's investment. Many funds will stop trading and consider liquidation if a substantial portion of their capital - say 50 percent - has been lost.
Some funds have produced stunning returns. Last year, for instance, the Tudor Futures Fund gained 201 percent.
Jay Klopfenstein, president of Norwood Securities, in Chicago, estimates that the funds he follows were up 34.1 percent in 1987.
But the funds can also drop sharply. In 1983, Klopfenstein's fund index fell 14.4 percent. This year, it is up only 2.5 percent.
The funds usually require a $5,000 minimum investment.
Leon Rose, publisher of the newsletter Managed Account Reports, said many funds charge an upfront fee of up to 4 to 6 percent of the investment. There are also management fees, trading costs and other charges. He said the annual fees can total 16 to 20 percent. So the funds have to do better than that for investors to profit.