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COMMODITY TRADING ADVISOR (CTA)

A Commodity Trading Advisor (CTA) is a professional investment manager who specializes in commodity futures and options trading. CTA investments are also referred to as Managed Futures or Managed Futures Accounts, as the commodity trader (CTA) actually manages each client's individual account, placing trades in the client's accounts directly on their behalf, like their own personal futures trader.

Absolute Returns

The strength of many CTA investments lies in their low correlation to the stock and bond markets, meaning you can make money whether stocks go up or down (or lose). This ability to post "absolute returns," paired with low correlation makes investing in a CTA a perfect candidate for portfolio diversification.

CTAs can make absolute returns by being able to play both sides of any market. They can buy futures positions in anticipation of a rising market or sell futures positions if they anticipate a falling market. Trading advisors can even use strategies employing options on futures contracts that allow for profit potential in flat or neutral markets.

Bear Market Protection

History shows us that managed futures are the place to be during bear markets and crises situations. Futures based investments are often viewed as a way to generate oversized returns due to the leverage built into futures contracts and potential for large moves, but it is their low correlation with traditional markets which causes managed futures investments to be volatility reducers and portfolio diversifies during the bad times.

The CSFB managed futures index performed very well during periods of overall market stress, showing positive performance in 1994 (surprise Fed rate hike), 1998 (Russian Debt Default / Long Term Cap. Failure), 2000 - 2002 (tech bubble burst), and 2001 (9/11 tragedy), while averaging over 9% higher performance than the S&P 500 stock index across those periods. Read our newsletter on Managed Futures as Bear Market protection

Compared to Trading Systems CTA's are often considered a more conservative approach than trading systems, because of the fact that they have track records which are either audited or subject to audit by regulators. They also have disclosure documents which are subject to audit and submitted to the regulators every nine months. These "D-Docs", as we call them, contain detailed background information, the advisor's past performance, and a description of the trading strategy the advisor plans on implementing for your account.

As for the performance - CTAs generally have smaller drawdowns and smoother performance than trading systems. And CTA's usually have higher minimum investments than systems - sometimes as much as $1 Million

Comparing the Two

CTAs	Trading Systems
Generally for investors with more risk capital to invest - $100K - $1 MM	Generally for investors without enough capital for a CTA: $5K - $50K.
For investors who don't mind paying fees (20% of profits) to the manager if they make $$	For investors who don't like to have to give up any profits - willing to risk more to keep more.
Generally have lower drawdowns and less volatility in returns	Generally have higher drawdowns and more volatility in returns
Better choice for hands-off investors, who invest with a year over year time frame	Better choice for hands-on investors, who invest with a shorter time frame of month over month
Work well in a portfolio combined with Trading Systems	Work well in a portfolio combined with CTAs

Performance & Management Fees

Most CTAs have terms similar to a hedge fund, with a 0% to 3% annual management fee, and 15% to 30% incentive fee, which means they take around 20% of the profits they make you. While some investors scoff at having to pay a portion of profits to the manager, we like the alignment of interests that presents - as the CTA doesn't make the bulk of their money unless the client makes money.

Notional Investing

A characteristic unique to managed futures accounts is the ability to use notional funding to trade. Because a futures trade requires only posting a performance bond with the exchange equal to roughly the amount of money that position could lose in a day, there is often a large difference between a CTAs required minimum investment amount and the amount which technically needs to be in the account to cover the performance bonds, or margin. This opens up the possibility of being able to deposit $50,000 to trade as $100,000, for example. One caveat, you will still be charged fees on the notional balance ($100K in our example), and those will be a much higher percentage of your actual balance ($50K in our example)

Read our newsletter on notional funding

Transparency & Liquidity. Two big advantages a commodity trading advisor managed account investment has over a commodity pool or alternative investments in vehicles such as hedge funds or real estate is full transparency and nearly instant liquidity. Investors can see all of their positions marked to the market at all times, and should an investor need cash for any reason, wires can be processed the same day if received by 11AM.

Tax Benefits

Managed futures accounts are taxed based on their value at the end of the year. This is good news for investors, as futures gains or losses are treated as 60% long term capital gains and 40% short term capital gains, NO MATTER the holding period. For example, an investor who holds a futures position for just a few minutes, or hours, can book 60% of the profits on that trade as long term gains - even though the trade was anything but long term. What a deal!

There is also no trade by trade accounting in futures, no wash sale rules, and losses can be carried back three years on futures based investments.

Read our newsletter on futures tax accounting

Don't Pay up front fees

We hope you decide to invest in a CTA program through Attain, but even if you don't, we would like to save you some money by telling you to NEVER pay up front fees for a Managed Futures Account. This practice is becoming more prevalent amongst futures brokers, and it is absolutely bad for the investor for three reasons:

1. The investor usually invests based upon a CTA track record, but that track record does not include the up front charge.
2. The investor stands to make considerably less with the CTA program over the course of the investment.
3. It's not a requirement for participation in the CTA program (you could invest in the same program at Attain and not have to pay it !!)

Read our newsletter on why you should not pay up front fees