Managed futures funds or Commodity Trading Advisors (CTAs) rank as the second best performing alternative index in 2008, according to Credit Suisse-Tremont.

This year, the CSFB/Tremont Hedge Fund Index has declined 19% through November compared to a 15.6% gain for the CSFB/Tremont Managed Futures Index. Only dedicated short-sellers have outpaced CTAs, up 16.8% in 2008.

Hedge funds are suffering their worst calendar year of performance in history and have attracted a blizzard of redemptions only exacerbated by the recent Madoff scam. Estimates point to approximately a 35% shrinkage of hedge fund assets in 2008 with many shops set to close as margins collapse and assets nosedive.

It’s a different story altogether for managed futures this year.

For example, as global markets crashed about 19% in October, managed futures as a group earned 5%. That’s the sort of diversification investors need now.

Managed futures funds or CTAs, trade over 100 highly liquid global futures contracts, including stock indexes, bond indexes, currencies and commodities. Provided there’s a trend to maximize, either up or down, CTAs can make money in any market.

Managed futures are certainly not a new asset class. They first started trading as a collective investment vehicle back in the late 1960s and were pioneered by such legends as Richard Dennis, Monroe Trout, Luis Bacon and John W. Henry.

The most popular trading model used by CTAs is the computer-generated trend-following system pioneered by Richard Dennis. There’s been no shortage of trends this year, especially for those traders selling short a host of global indices, including commodities.

The only major caveat is volatility; CTAs experience sudden and protracted draw-downs exceeding 15% when long-term market trends change forcing their trading models to adjust. That’s why for most investors a maximum 10% allocation is sufficient.

Unlike hedge funds, which can be largely illiquid products, managed futures are highly liquid with settlement of most contracts available on most major global exchanges. They’re also policed far more regularly by the NASD and the CFTC in the United States. You really don’t hear about managed futures or CTA scandals very often whereas some hedge funds seem to blow-up every year.

In the United States the individual investor must be accredited to purchase a managed futures limited partnership. This typically requires a gross income of at least $250,000 or a net worth of $500,000. But offshore, many of the same U.S. managers are available starting at just $30,000 and don’t require you to be accredited. Of course, if you’re an American citizen there are potentially onerous tax consequences on offshore funds, unless you tuck that investment away in a tax-deferred plan.

In a year when most asset classes failed to protect investors, managed futures did the job. These products thrive on short-term volatility. I’m sure we’ll see much more of that in 2009 and beyond as markets remain on edge. CTAs should flourish.