Managed Futures Education
Introduction to Managed Futures
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 series of articles 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 risk and the 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). However, 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.
In addition to commission, regulatory and exchange fees, typically there are two fees associated with investing in Managed Futures: management fees and incentive fees. A management fee is charged by the CTA to manage the assets they trade. An incentive fee is the percentage a CTA will charge on any new trading profits on the account. The incentive fee is paid on performance: if the CTA does not make a profit, you do not pay an incentive fee. Generally management fees are 2% of AUM/yr, and incentive fees are 20% of new trading profits.