GOING IT ALONE

The final option for the determined professional investor considering making an investment in managed futures is to do it alone. This is a trend that is particularly visible in Europe. It has several major advantages over using outside consultants.

Taking a serious look at the managed futures markets, doing the research and following the learning curve is firstly cheaper than using outside help and secondly can lead to greater confidence in making decisions.

In trying to find and evaluate suitable CTAs independently, the first thing, as always, is to do an extensive amount of homework. Researching the subject, by reading books such as this one, is an invaluable way to put down a fundamental knowledge for the next stage of the learning curve.

Assessing Requirements

A potential investor in any financial sector needs to analyse and define his or her requirements from that sector. In this case, the investor needs to particularly concentrate on what risk profile the funds going into a managed futures programme can endure.

Risk profiles vary considerably. If the money that is going into a managed futures programme is effectively money that can afford to be lost—in the worst case scenario—then clearly the requirement is for a trader who has a roller- coaster track record with 300 per cent gearing and massive volatility.

If however, the money going into the managed futures programme is pension fund money which carries with it a need to satisfy the requirements of its trustees that it is the sensible investment of a prudent man, then the ideal type of trader of a managed futures programme will be one who has very limited drawdowns (negative performance), steady positive returns and can prove both those things over a decent length of time.

Track Records

It will not come as much of a surprise to learn that most traders claim to have marvellous track records. In checking whether a trader is giving an accurate representation of his performance, the investor can use one of the evaluating services. These types of companies carry historical and current data on CTA performance which can give the investor a profile of the sort of trader under consideration.

Capital Adequacy

Despite the fact that CTAs don’t actually handle client money, they merely advise on the trading of it, it appears that European CTAs may fall under the requirements of the EC’s Capital Adequacy Directive (CAD). At the time of writing, the situation is not terribly clear.

European CTAs may be forced to maintain up to Ecu 730 000 (US$ 875 000) in capital reserves in order to meet the requirements of the CAD, according to various interpretations. There are three brackets of initial capital requirements for investment firms under the directive, but it appears increasingly likely that CTAs will fall into the highest category.

At the same time as the CAD announcement, the UK’s Securities and Futures Authority announced the recognition of a new regulatory classification DFM, derivatives fund manager, with a capital adequacy requirement of only £10 000 (US$ 15 000). This formal recognition of CTAs as a distinct category of SFA members was secured only after a year-long campaign and protracted negotiations at a working party made up of CTAs and SFA enforcement officers. With the CAD announcement it appears that these provisions will be over-ridden when the directive comes into force on 1 January 1996.

Lobbying is being conducted at domestic UK and European level by the industry and the SFA. It may prove to be the case that those CTAs who trade proprietary money to establish a performance record will almost certainly push CTAs into the highest bracket, making it extremely difficult for emerging traders to establish themselves.

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Finding and Evaluating Trading Advisers Part 3

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