In the wake of the global financial crisis, many academics and financial professionals are wondering if diversification is dead. This question is particularly vexing to the mutual fund universe–only government bond offerings turned in a positive performance last year–and many investors are looking for new ways to insulate their portfolios against future meltdowns.

Managed futures are one investment option that’s received publicity.

Managed futures accounts are separate accounts in which futures contracts based on a variety of commodities and assets can be traded. Although some of these accounts are managed by the investors themselves, many are handled by a professional manager known as a commodity trading advisor (CTA).

CTAs turned in an impressive average gain of 14 percent last year. And according to a decade of industry data, their average annual return has ranged from as low as 8.5 percent to as high as 21.3 percent–without a single negative year.

Over 85 percent of managers use proprietary trading systems that track trends and volume. Given the variety of futures contracts, results generated by these systems are largely uncorrelated to equity or fixed-income markets. Periods of high volatility are less of an issue–as evidenced by last year’s outsized returns–because the trading systems generally have the ability to go short and long.

But managed futures do pose other risks. Many of these trading systems achieve their optimal performance in highly volatile markets. As market volatility has moderated in 2009, the average return generated by CTAs has dropped to negative 0.2 percent. The S&P 500, however, is up more than 13 percent over the same period.

And there’s a fair amount of regulatory uncertainty; the Commodity Futures Trading Commission is weighing whether it will institute position limits in energy commodities.

That being said, managed futures still make sense for investors. Several studies have shown that adding a futures component to an investment portfolio lowers overall volatility and improves long-term returns. Again, because the performance of these assets is largely uncorrelated to the broader markets and they thrive in periods of high volatility, they make an excellent hedge for any portfolio.

Ken Steben of Steben & Company has some tips for investors seeking CTAs to handle separately managed accounts. “We look worldwide for advisors who have $100 million and up in assets under management with at least a five year track record,” he says. He also suggests judging managers by their long-term performance.

He also suggests using a firm that acts as a manager of managers, which provides an added layer of oversight to the process. With more than 20 years of experience in the field, he and his team can identify red flags at both publicly and privately run funds for fraud and lagging performance.

Of course, all of that comes with a price tag. Although separate accounts can be opened with as little as $10,000, small accounts are somewhat impractical because trading costs tend to be high and managers typically charge the traditional Two and Twenty–2 percent of total assets as a management fee and 20 percent of profits earned. Most advisors suggest funding accounts with a minimum of $50,000 and allocating 2 to 5 percent of an investment portfolio to managed futures.

There are options for investors who prefer to deal in traditional mutual funds or can’t afford to make such a hefty initial investment.

Our favorite is Rydex/SGI Managed Futures Strategy H (RYMFX), a relative youngster that launched in mid-2007 and one of the few managed-futures mutual funds out there.

Tracking the S&P Diversified Trends Indicator, an index that follows the 7-month exponential moving average (EMA) in 24 different types of futures contracts, the fund buys contracts when the near-month contract is higher than the EMA and sells when they’re trading below the EMA.

Although this strategy isn’t nearly as sophisticated as those you would expect to find with separately managed accounts, it offers the benefits of managed futures at a lower price–an initial investment of $2,500 for taxable accounts and $1,000 for IRAs. Prospective investors should hold this fund in a tax-advantaged account because it has the potential to generate substantial capital gains.

The fund’s annual expense ratio of 1.74 percent is a bit rich, but it’s the best option for retail investors looking to add the diversification benefit of futures to their portfolio.