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CTAs Explained
Commodity trading advisors are the professional money managers or traders that make up the managed futures industry. CTAs trade their clients' money on a discretionary basis and transact almost exclusively in the futures markets. At first glance, one might assume that all commodity trading advisors are alike, but CTAs differ in terms of their trading strategies, the markets they trade, their experience levels and the style of trading they use.
Because of their differences, it is important to distinguish the different types of CTAs. Comparing a manager that trades gold and silver on a short-term basis against a manager that trades corn futures on a long-term basis is not the best form of evaluation. In a sense, it is like comparing a manager of a technology mutual fund against a manager of a utilities-oriented fund. Therefore, the first process in evaluating the managed futures industry is to differentiate between the various ways that managers yield returns.
Emerging vs. Established CTAS
Another differentiating factor between commodity trading advisors is whether they are emerging or established. There are various opinions of what defines emerging and what defines established. The general definition, however, focuses on the fact that emerging managers typically have less than a three-year track record and less than $50 million under management. At first glance, it might seem that the only difference between an emerging and established CTA is their experience levels. However, this is not true. There are many emerging CTAs that have a substantial amount of experience working for other companies and who have finally started their own shop. Thus, while they might only have a few years experience trading on their own they are established traders in the industry and well-versed in its practices.
The major difference in distinguishing among emerging and established CTAs has a lot to do with how they generate their returns, as emerging CTAs can often outperform established managers. There are two main reasons for this. The first has to do with the fact that emerging CTAs are smaller and more nimble. Because they are nimble, they are often able to make transactions in certain markets that would be impossible for a larger, more established CTAs. The second reason is that emerging CTAs are often eager (and more aggressive) to put up numbers that allow them to pop on the radar screen of investors. An established billion dollar CTAs might not have that extra incentive to be aggressive.
There are, however, negatives to selecting an emerging CTA over an established CTA. While emerging CTAs might sometimes outperform their more established counterparts, the attrition rate is also higher. Many emerging CTAs often do not make it past their first year in business and some traders that put on the CTA hat do not have any experience beyond trading for themselves.
Summary
CTAs are registered with 2 regulating bodies for managed futures, the CFTC and the NFA. Registered CTAs are required to have current disclosure documents with program performance included.
Trading futures and options involves substantial risk of loss and is not suitable for everyone. There is risk of loss no matter who is managing your money. Selling options involves unlimited risk of loss. Past performance is not indicative of future results.