EVALUATING NEW TRADERS

While many of the above points are still pertinent in looking at new traders, the most fundamental point may be that their existing track record is inextricably wound up with that of the institution for which they have been working. In this case, a qualitative evaluation becomes more important, and the following points may help.

Things to look for in evaluating new traders:

1. Does the trader’s work experience include tradingfor an institution and if so, how long has the trader been working in that institution? Ideally this should be a period of at least two years.
2. Does the trader’s system of trading rely on analysis or is he or she effectively a ‘flow trader‘ making investment decisions on the basis of observation rather than analysis of those observations?
3. Does the character of the trader’s programme suit his or her own
   character? Is it plausible that this trader is able to trade in this way?
4. Is the trader’s experience very local, or would it stretch to other markets?
5. Is the trader’s programme robust?
6. Does the CTA think in terms of a percentage return on equity rather than a total dollar return to the client? It is essential that the potential CTA has a firm understanding of the importance of the bigger picture when handling client money, rather than just chasing after the last drop of performance.

SOURCES OF HELP

Trading Managers

If the process of choosing CTAs oneself appears simply too onerous, there are other options. In an effort to combat the particular problem of picking good from bad, some members of the managed futures industry recommend that an institution approaching this market employs the services of a trading manager. This is someone who works on behalf of the institutional investor, selecting trading advisers or CTAs to invest the money, and monitoring their performance once chosen.

Typically, trading managers are independent. Some trading managers manage only their own CTAs, most often because they have themselves developed from a CTA background, while others can act independently of in-house CTAs and choose any trader whose performance fits into the risk/reward profile of the fund.

While trading managers can certainly be an enormous help for the institutional fund manager new to the managed futures sector, the one big problem with using them is that they usually bring with them a new layer of fees with which to burden a fund. Given that the fashion is now for funds with lower fee structures, a trading manager may inhibit that objective. However, it is equally fair to say that trading managers are the subject of much closer scrutiny than has been seen before. In the role of an interface between the trading advisers and clients, the trading manager may, in fact, achieve significant cuts on fees.

Pension Consultants

Certainly in the UK, most pension funds employ consultancy firms who provide advanced actuarial and research services to support any changes or developments in their investment policies. Most of these firms have some knowledge of derivatives, although it can remain fairly hidden within the group. It may well be worth the while of a potential investor to hunt out the derivatives expert.

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Finding and Evaluating Trading Advisers Part 2

• Finding and Evaluating Trading Advisers Part 1
• Finding and Evaluating Trading Advisers Part 3
• Regulation of Managed Futures Funds in the US and Japan
• Common Terms Used in Measurement of Futures Funds
• Evaluating Shorter Trader
• European Performance
• The Evolution of Managed Futures Funds
• Brokerage Commissions Part 2
• Regulation of Managed Futures Funds in the US and Japan
• Managed Futures the Lintner Theory