These charges are usually quoted on a round turn basis, that is, representing the buy and sell process, and can vary significantly, from between US$ 15 and US$ 60 a round turn.

DEALING WITH THE FEES PROBLEM

Funds that are guaranteed carry more charges again, with a fee to the bank that is underwriting the guarantee, a fee for the zero coupon bonds or whichever high-grade security is being used for the guaranteed elements and so on. Clearly the institutional investor, for whom investing in futures is not the magical, mystical activity that it may be for the retail investor, is going to balk at paying these fees.

For their part, CTAs are generally not happy with high fees either, because it puts more of a strain on them to perform if up to 12 or 13 per cent of the money under management has disappeared in the first second that the fund starts trading. For some retail guaranteed funds, this is particularly important because these funds have high stop/loss points, which means that if the fund’s capital drops by more than 15 per cent, for example, the fund has to be wound up. Obviously, this stop/loss point can be hit much more quickly if fees are high.

Allen says in Managed Futures: An Institutional Investor’s Primer that:

There are two significant potential problems with a manager of managers program that bear mentioning. To the extent that these problems are monitored, they can be controlled. First of all is the issue of costs and fees. Commodity Pool Operators must pay fees to the individual CTAs. These fees are generally structured as a flat percentage of assets with an additional performance based component. The CPO will also typically tack on an additional charge for administering the program. Finally, to the extent that the CPO is associated with a brokerage operation they can require the underlying CTAs to direct brokerage through their organization. This triple tiered cost structure can create a significant drag on portfolio performance. On a percentage of assets under management basis, total costs for a managed futures program can exceed those associated with an institutional domestic equity portfolio by five to 20 times. Each component of this cost structure is to some extent negotiable. Proper due diligence will involve ensuring the most competitive total fee and cost structure for the desired level of service.

Allen, Managed Futures: An Institutional Investor’s Primer

The second problem referred to by Allen is the difficulty of focusing on recent performance when selecting CTAs.

According to the work of Frank Pusateri and John Stapleton, the level of commissions affects more than just the performance of a fund. Reporting this study in Managed Futures Come of Age, Epstein (1992) says:

In a survey conducted by Pusateri and Stapleton (1990), trading advisors whose equity was raised by large brokerage firms had track records reflecting commissions in excess of US$ 50 per round turn. ‘Substantial trading advisors’ had commissions as high as US$ 80 to US$ 90 per round turn. These commission rates were significantly higher than traders who raised their own equity for client accounts and pools which had average commission rates of US$ 25 per round turn. The study showed some had commissions as low as US$ 15.

By examining the commission rates and annual gross commission as a percentage of equity, Pusateri and Stapleton estimated the historical effect of a lower commission rate on an advisor’s track record. They concluded that an advisor with a composite track record based on an average commission rate of US$ 75 (including 12 per cent of equity in annual commissions) would have increased their annual performance by 8 per cent if commissions were reduced to US$ 25 .. .

Pusateri and Stapleton’s work also showed that rates of commission affect the risk-reward ratios in funds.

A recent study in Managed Derivatives magazine showed that high fees cramp performance.

Possibly related posts: (automatically generated)
Brokerage Commissions Part 1

• International Investing Concerns and Limitations Part 2
• Brokerage Commissions Part 2
• Introductory Commission
• Financial Consideration: Fees
• Managed Futures Paperwork and Other Regulatory Matters
• RETAIL SALES
• The Simple Managed Futures Trading Regulatory Recourse
• Market Wizards
• European Performance
• Participants in the Funds: CPO and CTA