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Don't Pay an upfront sales fee, load or sales charge

May 12, 2008

 

While the terms "front end load" and "no load" are rather common in the mutual fund world, the terms have thankfully not been very pervasive among professional Commodity Trading Advisor (CTA) programs. This is a good thing - as any mention of the word "load" involves more cost for the investor - but unfortunately the practice of charging an investor a front end load to participate in a CTA program is becoming more and more common.

For all of those investors within ear shot - DON'T FALL PREY TO THIS PRACTICE - DON'T PAY AN UPFRONT SALES FEE.

We have a few problems with paying an up front fee: 1. The investor usually invests based upon a CTA track record, but that track record does not include the up front charge. 2. The investor stands to make considerably less with the CTA program over the course of the investment. And 3. It's not a requirement for participation in the CTA program (you don't have to pay it !!)

Load vs No-Load

A quick search on any mutual fund website will show categories of funds separated by load and no load. In fact, load funds usually don't have any special qualifier, merely going by their names, while no-load funds tend to advertise the fact that they are such. What does all this mean?

Quite simply, no load funds are those which don't charge any up front fees - while load funds involve some up front charge, usually between 2% and 8%. A typical up front load structure reduces the amount of the investment by the amount of the "load", so a $1,000 investment paying a 5% up front load would actually be paying $50 in expense right off the bat, and only investing $950.

99% of all CTAs are "no-load", meaning they don't charge an up front fee. So where do loads and up front fees come in for CTA investments? The CTA itself does not have to charge a load in order for this practice to happen - the brokerage firm the account is held with can put through the up front charge before notifying the CTA to begin trading - basically keeping the CTA in the dark as to how much money the investor really put up. The client has to of course be apprised of the fee, and agree to it - but in many cases they don't know any better, being new to managed futures and CTAs.

Three Issues with An Upfront Fee, Load

1. Our first problem with charging an up front fee, is that the track record of the CTA investment is overstated for the investor who paid the up front fee. If an investor makes an informed decision to invest based on that CTAs track record, shouldn't the track record reflect the up front fee being charged? It definitely should - and the regulations state that any such fee a CTA charges is reflected in their performance track record. But here's the catch - it's not the CTA's fee, it's the brokerage firm's, so the CTA doesn't have to include it in their track record. And because the brokerage firm isn't managing the money - they don't have to keep their own track record which reflect the fees either. The National Futures Association sniffed this practice out in mid-2005, putting out an advisory that brokerage firms need to outline all fees an investor will pay in the form of a breakeven analysis which reflects the rate of return the customers must receive on the investment to break even in the first year.

2. The breakeven analysis is all fine and good, but it still ignores the fact that the investor who pays an up front fee will, by definition, under perform an investor who does not pay the fee. This is like lining up two identical sprinters in a race, but giving the one sprinter a 5 step head start. There's no question who will win the race, and there's no question the investor with a head start (no up front load) will win the investing race against the investor paying the fee and starting out well behind.

Salespeople who charge the fee may try and say that a small fee of under 5%, for example, won't matter much over the course of a few years on an investment that may make 50% or more in a single year, but that argument forgets about the power of compounding returns.

The following table shows the cumulative net profit of two fictitious investors in the Clarke Capital Global Basic program since inception in February 1996. The table assumes both investors invested $100,000 into the program, but that the 2nd investor (labeled "with load") paid a 6% up front sales charge, or load fee. This would have caused investor number 2's starting capital to be reduced by a mere $6,000 - which arguably seems like small potatoes when considering the investment has returned over 2000% since inception (yes 2000%).

But the investor with the $6,000 "head start" because they didn't pay the up front fee, earned 13.08% of $100,000 in the first month, or $13,080, while the investor who paid the load only earned 13.08% on $94,000, or $12,295. While that doesn't seem like much, the next month's gains will be on the higher amount, and so on and so on, until the compounded value of the investor who didn't pay the up front fee would be worth $2,398,225 today, versus just $2,248,332 for the investor who did pay the fee. That's a difference of close to $150,000 !! I don't know about you - but I could sure use an extra $150,000 lying around.

3. The final issue here is that you don't have to pay the fee. Of all the CTA programs known to Attain, none require the broker to charge an up front fee. Further, all work with several different brokerage firms, meaning if one broker is demanding you pay the up front fee, you can merely open the account at a brokerage firm like Attain who doesn't charge the fee.

This is different than in the mutual fund world, and even in the hedge fund world, where there are a lot of load funds in which that is the only choice. Either pay the fee or don't invest. But in the case of CTAs where you can go to a firm like Attain and not pay the fee, there is no sense in paying an up front fee.

Some slick salespeople may try and tell you that if you take the sales charge off the top, that is, put up $106,000 in order to invest $100,000 and pay the $6,000 sales charge, then the compounding effect doesn't happen because both investments start at $100,000. But that is just fancy talk aimed to deceive, as you would need to compare $106K invested with no load versus $100K after the load. The main lesson is that the up front fee needs to be considered as part of the investment - and included in all of the stats and projections you may use in judging the suitability of such an investment.

The bottom line is, tell your broker you're not going to pay an up front fee, or go to a firm like Attain where we never have, and never will charge an up front fee.

- Walter Gallwas

IMPORTANT RISK DISCLOSURE


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Feature | Week In Review: Energy and precious metals markets surge, stocks down slightly | Chart of the Week

***Overview***

Supply disruptions and tightness in certain sectors of energy complex ruled price activity again sending prices to new records in some cases during the past week. Heating oil set the stage with gains of +11.5% with global growth and diesel demand sparking gains. Crude +7.6% and RBOB Gasoline +7.5% also found added support from continued attacks on pipelines in Nigeria and on geopolitical concerns between the U.S. and Venezuela. Natural Gas +6.6% also posted strong gains as seasonal summer demand came into focus along with ideas that some companies may be, on the open market, already buying supplies for the winter.

Precious and Industrial metals posted strong gains last week as several factors played a part in gains. Inflation fears continue to be a dominate supporting factor, but growth in the Middle East and Asia continue to spark buying confidence. For the week Platinum gained +9.2%, Palladium was up +5.4%, Gold was up+3.2%, and Silver was +2.7% higher.

Stock futures eased lower last week as inflation worries, sparked by the rally in energy and metals sectors, took some of the starch out of recent gains. Stocks also found pressure from some weaker-than–expected earnings figures, despite the majority of First Quarter earnings having been decent compared to early fears. For the week SP futures lost -1.9%, NASDAQ futures were down -2.5%, and Dow Jones futures end up losing -2.5%. In small cap trading the Russell 2000 futures -1.2% and SP Midcap 400 futures were basically flat.

Currencies & Bonds had a slow week of trading as the US Dollar finished the week a touch lower against most continentals. US Dollar Index futures fell -.6% for the week as investors seemed to take profits after the recent rally. Lower trading was also sparked by the rally in inflation sensitive sectors which slowed down the movement of money into U.S. dominated markets. Euro Currency, Swiss Franc futures ended slightly higher for the week with the British Pound down -.9%. In bond trading the benchmark US 10 Year Note futures finished the week +1.5%, and the US 30 Year Bond futures were up +1.0% on safe haven buying due to worries of more economic hurdles for the U.S.

Commodities caught the inflation driven rally last week as most sectors added decent gains. In the grains Soybeans were up +4.0%, Corn was up +2.5%, and Cotton gained +2.9% while Wheat futures posted small losses. In other food sectors Cocoa futures gained +4.8%, while the livestock sector headed higher as Live Cattle gained +2.6% and Lean Hogs up +6.5% on continued strong foreign demand.

***CTAs***

Trend following managers have started out strong in May due to very bullish conditions in the energy and metal sectors. There are quite a few managers that are posting profits after 1 week of trading but leading the way is the Vision Capital Global Futures program with gains of +15.42% for the month. The Vision program is certainly not for the faint of heart as it is very aggressive and is currently holding positions across 45 different markets. The other hot trend following program so far in May is the Longtermtrading.com Navigator program which is up +8.72%. Most of the gains seen in this program have been in the aforementioned energy & metals markets which have been very kind to trend followers so far this month. Not to be outdone, Hoffman Asset has also had a strong month posting returns of +2.36%. Other profitable programs include the Attain Portfolio Advisors Modified Program which was up +1.31% and Dighton USA which has seen returns of +0.35% so far in May. On the downside, managers in the red include Northside at -1.49% and the Attain Portfolio Advisors Strategic Diversification program at -0.76%.

Option selling managers have had a strong start to the month as well. Leading the way is Ascendant at +4.19%. Ascendant continues to show great resiliency as they work to battle back from their disastrous January drawdown. Other option sellers in the black include the Cervino Diversified 2X program at + 0.97%, Zephyr Aggressive at +0.84%, ACE SIPC at +0.57%, Cervino Diversified Options at +0.32%, Crescent Bay at +0.30%, Raithel at +0.20%, and Diamond Capital at +0.17%. Option sellers with negative returns thus far include Zenith at -0.13%, Crescent Bay Balanced Volatility and Zephyr Moderate at -0.31%. Finally FCI is down slightly at -0.40%.

Agriculture Traders are also looking good with several managers posting numbers in the black for May. In the hogs the NDX Shadrach program is up +1.99%, while the NDX Abedengo program is up +0.88%. Multi market Agriculture trader Chicago Capital has trades on in corn and cattle for gains of +1.13% thus far. Finally Rosetta, which trades both spreads and directional positions, is down -1.46% for the month.

Finally in FX the Wallwood FX program is leading the way with gains of +3.33%. The PFG Managed FX Devrim program is next at +0.34% and Fit FX is also in the black at +0.15%

***Trading Systems***

The start of the month has been slow for many the day trading systems. For the week, SP futures finished in the red at -1.9% which would generally lead to solid opportunities for day traders; however there were not too many trading opportunities available causing for most to end in the red. Despite the lack of opportunity there was some money to be made however and Waugh eRL was the top performing US day trader after making +$492.00 per contract. Across the Atlantic Kappa 12/1 DAX which was the top performer with returns of +$2871.79 per contract. Other systems that traded include BetaCon 4/1 ESX which lost -$462.65 per contact, Compass SP -$1179.55 per contract, Pivots Weekly SP -$2700.00 per contract, Rayo Plus DAX -$4154.00 per contract and Beta v2 which lost -$7466.12 per contract.

The swing traders found success in the US & European bond markets. Signum Bund (German 10 year) reversed long and closed out its previous short trade for profits of +$3734.20 per contract. Signum TY also closed out a profitable short trade for gains of +$781.25 per contract and is now long as well. In the equities Ultramini ES had a nice week making +$795.00 per contract while SeasonalST also found success making +$640.00 per contract.

Long term trend followers had a very slow week as no new positions were added. Notable trades include Aberration Plus which is short Euro Bund and Relativity which is short in the 5 year note.

IMPORTANT RISK DISCLOSURE
Futures based investments are often complex and can carry the risk of substantial losses. They are intended for sophisticated investors and are not suitable for everyone. The ability to withstand losses and to adhere to a particular trading program in spite of trading losses are material points which can adversely affect investor returns.

Past performance is not necessarily indicative of future results. The performance data for the various Commodity Trading Advisor ("CTA") and Managed Forex programs listed above are compiled from various sources, including Barclay Hedge, Attain Capital Management, LLC's ("Attain") own estimates of performance based on account managed by advisors on its books, and reports directly from the advisors. These performance figures should not be relied on independent of the individual advisor's disclosure document, which has important information regarding the method of calculation used, whether or not the performance includes proprietary results, and other important footnotes on the advisor's track record.

The dollar based performance data for the various trading systems listed above represent the actual profits and losses achieved on a single contract basis in client accounts, and are inclusive of a $50 per round turn commission ($30 per e-mini contracts). Except where noted, the gains/losses are for closed out trades. The actual percentage gains/losses experienced by investors will vary depending on many factors, including, but not limited to: starting account balances, market behavior, the duration and extent of investor's participation (whether or not all signals are taken) in the specified system and money management techniques. Because of this, actual percentage gains/losses experienced by investors may be materially different than the percentage gains/losses as presented on this website.

Please read carefully the CFTC required disclaimer regarding hypothetical results below.

HYPOTHETICAL PERFORMANCE RESULTS HAVE MANY INHERENT LIMITATIONS, SOME OF WHICH ARE DESCRIBED BELOW. NO REPRESENTATION IS BEING MADE THAT ANY ACCOUNT WILL OR IS LIKELY TO ACHIEVE PROFITS OR LOSSES SIMILAR TO THOSE SHOWN; IN FACT, THERE ARE FREQUENTLY SHARP DIFFERENCES BETWEEN HYPOTHETICAL PERFORMANCE RESULTS AND THE ACTUAL RESULTS SUBSEQUENTLY ACHIEVED BY ANY PARTICULAR TRADING PROGRAM. ONE OF THE LIMITATIONS OF HYPOTHETICAL PERFORMANCE RESULTS IS THAT THEY ARE GENERALLY PREPARED WITH THE BENEFIT OF HINDSIGHT. IN ADDITION, HYPOTHETICAL TRADING DOES NOT INVOLVE FINANCIAL RISK, AND NO HYPOTHETICAL TRADING RECORD CAN COMPLETELY ACCOUNT FOR THE IMPACT OF FINANCIAL RISK OF ACTUAL TRADING. FOR EXAMPLE, THE ABILITY TO WITHSTAND LOSSES OR TO ADHERE TO A PARTICULAR TRADING PROGRAM IN SPITE OF TRADING LOSSES ARE MATERIAL POINTS WHICH CAN ALSO ADVERSELY AFFECT ACTUAL TRADING RESULTS. THERE ARE NUMEROUS OTHER FACTORS RELATED TO THE MARKETS IN GENERAL OR TO THE IMPLEMENTATION OF ANY SPECIFIC TRADING PROGRAM WHICH CANNOT BE FULLY ACCOUNTED FOR IN THE PREPARATION OF HYPOTHETICAL PERFORMANCE RESULTS AND ALL WHICH CAN ADVERSELY AFFECT TRADING RESULTS.