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How they work and what to look for in a CTA. You can hardly go a day without hearing some type of news about the commodity markets. Investing in commodities is booming with many markets posting record trading volume at the major commodity exchanges.
The Barclay Group, a leading provider of Managed Futures and Hedge Fund data has confirmed this huge inflow of capital into the commodity markets. In 2003, money under management in Managed Futures accounts was 86.5 Billion dollars. By year end of 2006, Managed Futures capital grew to 170 Billion. In 3 years, funds under management in Managed Futures accounts increased by more than 83 Billion dollars! This is a substantial allocation into what many investors are seeing as a whole new asset class.
More and more sophisticated investors and pension funds are investing in managed futures accounts for good reason. The Chicago Board of Trade concluded in their brochure 'Managed Futures - Portfolio Diversification Opportunities' that the benefits of a managed futures account within a well balanced portfolio include
1. Reduced Portfolio Volatility Risk 2. Potential for Enhanced Portfolio Returns 3. Ability to Profit in any Economic Environment 4. Ease of Global Diversification
This study also outlines the impact of Managed Futures on a traditional portfolio from 1980 through May 2003. As the graph below shows, a portfolio without Managed Futures under performs and is more risky than a portfolio including Managed Futures. The portfolio that exhibits the highest rate of return and least volatility is comprised of 41% Stocks, 41% Bonds and 18% Managed Futures.
How Managed Futures Accounts Work Managed Futures Accounts are traded by registered Commodity Trading Advisors (CTAs) who are primarily compensated through an incentive program where the trading advisor, the CTA, is paid on a quarterly basis based on profitability. Our research shows that "standard rates of compensation" usually fall between 20-25 % of profits, after all costs per quarter. Some, not all CTAs also charge a small Annual Management Fee of 1-2% of assets under management.
What makes an investment in a Managed Futures Account unique compared to many traditional investments is how a CTA is compensated. There are not many investments available where an advisor sees little or no compensation unless they perform for you. Accounts do not pay incentive fees unless they surpass a previous 'High-Water' Mark of net equity.
Investors utilizing a CTA to manage their trading account have full access to view their account on- line at any time of the day. Investments in Managed Futures accounts are totally transparent and all transactions are e-mailed for your review.
Disclosure Documents
CTAs are some of the most scrutinized and audited of all investment professionals.
A full Disclosure Document (D-Doc) is required to be updated by the CTA at least once a year. The Disclosure Document contains a wealth of information about the specific CTA. All D-Docs have to be reviewed by the NFA and CFTC before investors can review them.
Disclosure Documents provide biographical information on the CTA and typically review the advisors philosophy of trading. A review of the trading program along with a full description of fees, potential conflicts and risk management must be disclosed. The CTAs Trading Record is also contained in the Disclosure Document
Track Records
Investors should take note of the Trading Advisors Track Record when comparing CTAs. A track record in itself should not be the sole reason for choosing a specific CTA. Rather, the complete trading philosophy along with their performance data should be reviewed. The track record typically shows monthly performance data spanning several years. All gains and losses are disclosed after fees have been deducted. When reviewing a CTA's performance record, investors should consider the following:
1. When the trading program began 2. What has been the worst peak to valley drawdown 3. How much money is under management 4. The number of accounts closed with profits or losses.
A strong performance over a short period of time may be nothing more than luck. However, positive performance over a long period of time speaks volumes about a CTA's trading acumen.
CTA's offered by Ira Epstein and Company
The Managed Account division... [download for more]
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