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Professionally Managed Futures Accounts may be a valuable investment alternative. However, like any investment decision, prudent research and consideration should be made before investing. This guide will introduce you to managed futures. Your decision to invest in a managed futures program should only be made after a thorough research and analysis of managed futures and the risks and rewards this alternative investment presents.What is a Managed Futures Account?A professionally Managed Futures Account is a discretionary trading account where you give permission to a Commodity Trading Advisor (CTA) to make all trading decisions on your behalf through a revocable power of attorney or a third party trading authorization.Investing in a managed account relieves you of the concerns associated with the trading facet of investing i.e. market timing, asset allocation, stop loss protection, etc. You make the large decisions of who to authorize to manage your account and how much risk capital to invest. To facilitate this, you review ranking, profile, and performance measurement reports and of course the individual CTAs disclosure document to screen and qualify the investment for your particular circumstances.What is a CTA?A CTA is professional trader known as a "Commodity Trading Advisor". A CTA is an individual or firm who, for pay, trades accounts for individual clients or for commodity pools and/or who provides analysis, reports or advice concerning futures and options trading. Traders with this designation are generally required by the US Government to submit a disclosure document which outlines who he or she is, states the fees and expenses charged to accounts and reveals the trader's performance track record. Additionally, information on the Advisor's trading program is explained, as well as any conflicts of interest or disciplinary history that may be material.Why Managed Futures?The ability of Managed Futures to offer a potential protection in periods when the stock markets are not performing well is one of the main strengths. This is the most important and valuable contribution and the main factor that attracts institutional investors. Additionally, investors' willingness to explore opportunities in new global markets has contributed to the growth of managed futures. Another major factor has been investors' willingness to accept the potential benefits of a professional, the CTA, trading their account. While it is common for individuals to invest in the stock and bond market, it is not as common for individuals to invest in the futures markets.Moreover, it is difficult for an individual to successfully trade on their own in the futures markets. In fact, U.S. Government studies have suggested that up to 90% of individuals who trade futures by themselves -- meaning the individual makes the buy and sell decisions -- lose money. The reasons why are worth exploring.When trading in any market, knowledge of the vehicle being traded is essential, and clearly people who know nothing about soybeans or crude oil trading are likely to be at a major disadvantage against professional traders. Moreover, the futures markets are volatile and highly leveraged, meaning a small price movement can have a tremendous impact on trading results. Is it any wonder, then, that individuals trading on their own often lose? An experienced CTA trading full-time on behalf of an individual may increase the chances of success. However, just as in any other investment, there is no guarantee of profits, and a CTA cannot eliminate the risk inherent to futures trading.The following table illustrates what we believe are the primary reasons why individual traders success in the futures market has been inferior. While the following characteristics are not true for all CTA’s or all individual traders, we believe that the vast majority exhibit these types of traits based on our twenty plus years in the futures industry, as well as interviews with both CTA’s and individual traders we have had the opportunity to be associated with.In the last 20 years, investor participation in the world's stock and bond markets has dramatically increased in large part due to the growth of mutual funds, individually managed stock accounts and trading technologies. Similarly, investor participation in alternative investments has increased through investor participation in futures markets, which include managed futures accounts. The chart below demonstrates the growth in managed futures since 1980.
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