The CTA is an individual or organization which, for compensation or profit, advises others as to the value of or the advisability of buying or selling futures contracts or commodity options. Providing advice indirectly includes exercising trading authority over a customer´s account as well as giving advice through written publications or other media. The CTA makes all trading decisions on behalf of the client through a revocable power of attorney. Registration with the National Futures Association is required unless You have provided advice to 15 or fewer persons during the past 12 months and do not generally hold yourself out to the public as a CTA or You are in one of a number of businesses or professions listed in the Commodity Exchange Act or are registered in another capacity and your advice is solely incidental to your principal business or profession.
CTA's are regulated by the Commodity Futures Trading Commission (CFTC) and by the National Futures Association (NFA), the congressionally authorized self-regulatory organization of the futures industry. All trading advisors must be registered with the CFTC and those who manage customer accounts must be members of the NFA. Advisors´ Disclosure Documents are required to be submitted to the NFA for review in advance of distribution to prospective investors. On an ongoing basis, the NFA audits Disclosure Documents (particularly performance information), promotional materials, and trading activities. Many CTA´s update their performance data on a monthly basis. Violations of CFTC or NFA rules can result in financial penalties, suspension or complete cessation of trading privileges and other penalties.
Investors should take particular note of the Trading Advisors Performance Record. However, this in itself should not be the sole reason for choosing a specific CTA. As mentioned above, the Disclosure Document spells out an advisors philosophy and trading style. This should be reviewed along with the track record in making your decision. Track records are important and should show performance tables, spanning several years or more. A strong performance over a short period of time may be nothing more than good fortune. However, positive performance over a long period of time especially in markets that have experienced bull bear and flat trading ranges speak volumes about a CTA´s trading abilities.
Track record Components to take careful note of:
- Length of the trading program...............Good fortune or Sustainable Investing?
- Worst Peak to Valley drawdown............Could your account be profitable assuming worst entry?
- Assets under Management ..................Has the manager significant assets under management?
There are some individual investors who are highly successful in directing their own futures trading if they have the knowledge, experience and resources to do so. However the vast majority of self directed investors have struggled in their efforts to become successful in futures trading. Studies indicate that as many as nine out of ten self directed traders lose money. When it comes to Managed Futures, of the 119 funds and pools in the Managed Account Reports Fund/Pool Qualified Universe Index that traded from January 1990 through October 1996, 81% were profitable over the full time period.(Source -MAR)
Managed futures are not appropriate for everyone. A determination must be made as to a particular investor´s suitability, the investor should be provided with all of the necessary information to make sure he or she understands both the risks and possible rewards of this type of investment. In addition to having the required risk capital, an investor needs to have realistic expectations about returns on investment and tolerance to drawdowns that may occur with Managed Futures products. The risk of loss always exists in Futures trading no matter how skilled a trader an individual CTA may be.
There are several companies that offer investors access to well-organized databases of CTAs, where you can rank performance, look at best and worst performances by a money manager and compare them to others. One company offering a database of over 120 Managed Investment providers is IBTRADE (www.ibtrade.com). There are several company offering similar type databases, however, the IBTRADE CTA database is free.