Sign up now to receive our free newsletter
Searching for Clues in CTA Disclosure Documents
December 17, 2007
Far too often, investors look at the 30-60 page Disclosure Documents of a CTA program, and simply skip to the signature pages when investing in managed futures. If you are guilty of skipping over the details in the disclosure document - your are not realizing just how important the disclosure document is.
The Disclosure Document is a requirement for a registered CTA to provide to investors, and is more than just a sales piece or legal disclaimers - it contains important facts and figures the manager is required by regulations to disclose to its investors, so they can make an informed decision on whether to invest.
So before you invest in a CTA - ask yourself whether you have received and thoroughly reviewed the disclosure document -- before you sign the advisory agreement? And ask yourself whether you clearly understood the disclosure document, including the statement of fees, the potential for loss, your right to withdraw your funds and the "break-even analysis?"
With investments in the hundreds of thousands of dollars - not reading the "play book" before you invest is likely going to cause you some angst later on, whether in unexpected losses, inability to withdraw funds in a timely manner, or exposure you didn't expect.
There is much more than annual returns and drawdowns when choosing the right CTA to manage your money. Those are the mathematical reasons, but there should also be sound "fundamental reasons" for investing based on what you read in the Disclosure Document. Basically - are you comfortable with the manager, their stated trading style, and their track record.
Below are 6 main points you should make sure you cover in the Disclosure Document:
1. Manager's background - Has the manager only been registered for a year and used to be in a completely different field prior to that? That would worry me. Does the manager have any formal training such as the CFA or alternative investment equivalent CAIA? How about their educational background? The background of each of the principals involved should make you comfortable that they have the experience necessary to manage your money successfully.
2. Trading Program Description - Even if you are very comfortable with the manager's background - you still need to be comfortable with the type of trading they are doing. For example, many investors get lulled to sleep by the consistent past performance of option selling programs while not realizing there is a big source of risk due to the naked short options. Simply reading the program description where it clearly states the manager will be selling naked options removes that surprise. And the program description can give investors some protection as well. If an advisor says they will only be trading the grain markets, and next thing you know there is a Natural Gas position, that's obviously a problem. The trading program description can give investors some recourse for losses incurred by the program outside of the strategy described in the disclosure document.
3. Risks - Most of the risk disclosures will admittedly put you to sleep, as the lawyers try and cover every possible scenario to best protect the manager (such as the FCM may fail). But there are often strategy specific risks you should be aware of and incorporate into your decision.
4. Conflicts of interest - CTAs are required to list any arrangements which may be a possible conflict of interest. The most common such arrangement is if a CTA receives a portion of the commission charged on accounts it manages. This can lead to a potential conflict, as the manager could be tempted to over trade the account to generate commission revenues. Part of the growth in CTA-like programs doing forex only - is that forex managers can share in the bid/offer spread markup with the prime broker, and do not have to disclose that conflict of interest, because they are not required to provide a disclosure document. As always, beware of Forex and its different set of rules.
5. Fees - Any CTAs performance numbers will be presented after fees, so in one sense it doesn't matter what the fees are if you are comfortable with the performance. But on the other hand, you should make sure the fees are in line with the rest of the industry. A 2% management fee and 20% incentive fee are pretty standard, and anything higher than those numbers should probably be avoided, unless they are truly one of a kind and worth the price of admission, so to speak.
6. Performance - The disclosure document is "THE Authority" on the performance of any CTA, and demands your attention. For many reasons, the various reporting websites can and will have bad data for a CTA track record, and investors should always check the source by looking at the 'Past Performance' in the disclosure document. Is the track record comprised mainly of proprietary account (less trustworthy) data? Was their a different fee structure of the accounts reflected in the track record? How has the manager done in the past with other programs? How many investors are having their accounts managed? Would you feel comfortable if only 1 or 2? These are all questions that can be answered when looking at the disclosure document.
So don't blindly invest with a CTA or just peruse the Disclosure Document. Study it, research it, and ask more questions about it. The results will be better due diligence on your part, and in the process more comfort for your CTA investment.
- Walter Gallwas
Important Risk Disclosure
IMPORTANT RISK DISCLOSURE
Not on our mailing list? Sign up now to receive this weekly newsletter.
Past Performance is Not Necessarily Indicative of Future Results: The dollar amounts shown below represent the actual profits and losses achieved on a single contract basis in client accounts, and are inclusive of a $50 per R/T commission ($30 per emini). Except where noted, the gains/losses are for closed out trades. Percentage gains/losses are hypothetical and based on developer recommended initial balances as listed at www.attainaccess.com. Please carefully read the important risk disclaimers below.
Stocks finished the week in the red again last week despite the Fed’s best efforts to prop up the still tumbling credit marketplace. Last week the Fed was able to negotiate lending agreements with European and Canadian Banks that will allow banks in those countries to lend US Dollars directly to the US marketplace. This, along with the 25 basis point interest rate cut, should hopefully begin to provide more liquidity to credit markets worldwide. However, inflation has now become a concern again as both the CPI (consumer’s price index) and PPI (producer’s price index) moved higher last month, which indicates that inflation is on the rise. Stock futures moved lower for the week with SP futures losing -2.61%, NASDAQ futures were down -2.79%, and Dow futures fell -2.16%. Smallcaps were hit hard as well with Russell 2000 futures losing -4.41% and SP Midcap futures losing -3.74%.
In currency trading the US Dollar continued to rebound last week as the US Dollar Index finished the week up +1.43%. The Euro (-1.59%), Swiss Franc (-2.11%), Japanese Yen (-1.54%) and British Pound (-0.75%) all moved lower against the Dollar for the week. In bond trading 30 year bond futures fell -1.17% and 10 year note futures were down -0.54% due to the inflation data.
Energies and grains continue to take center stage in commodity trading. Crude Oil prices are now back above $90 per barrel after flirting with the mid 80’s for the last couple weeks. Crude futures finished at 91.55 per barrel (+3.82%) last week while RBOB gasoline futures gained +3.20%. Both Natural Gas (-1.35%) and Heating Oil prices (-4.12%) moved lower for the week.
Grains also continue to be volatile with Wheat (+6.29%), Corn (+4.79%) and Soybeans (+3.16%) all skyrocketing higher. In the metals Copper (-5.42%) and Silver (-3.60%) moved lower while Platinum (+1.16%) and Palladium (+2.80%) traded higher. Gold finished the week unchanged. Finally in the meats both Lean Hogs (-2.47%) and Live Cattle (-1.32%) finished slightly lower.
. ***Commodity Trading Advisors (CTAs)***
Traditionally December is one of the most active months of the year for the commodity markets as many CTA's, funds, and commercial hedgers work to finalize their holdings for year end reporting. So far this year is no exception.
Leading the CTA's so far this month is Dighton USA with gains of aprox +18% for the month to date. For those of you tracking the equity curve you'll note that Dighton was down as much as -38% toward the end of November from their October equity high and has since recovered over 26% based on a fixed 100k investment. As we have reported on several times over the course of the past year, Dighton is a highly volatile strategy; however if your entry is timed properly the program has the potential to be very explosive right out of the gate. Here is a link to our September 10th newsletter on the topic: http://www.attaincapital.com/alternatives/alt_sep1007.htm#Topic.
Elsewhere, spread trading strategies are experiencing mixed results with NDX Abednego ahead aprox 1%, Shadrach ahead +1.6%, and Chicago Capital down -2% so far in Dec. Spread traders usually like to see markets turn against their position up front so that they can leg into a larger position - and we'll be waiting to see if this strategy pans out for Chicago Capital's current open trades that have been established over the past 2 weeks.
In the Index Options markets - it is option expiration this week, which means that all eyes will be on the stock indices over the next 4 days of trading. So far Ascendant Strategic 1 is leading the months performance with open trade gains of +3.5%.
Finally, Attain Portfolio Advisors main program has been enjoying the added volatility of both the energy and stock index markets so far this month as the main program is ahead aprox 2% and the Modified is ahead aprox 1.75%.
***Day & Swing Trading***
The Fed’s ¼ point rate cut was not enough to keep investors from turning bearish on stocks last week. Following the announcement on Tuesday, stocks and treasuries sold off sharply in response to the language more than the cut itself. The Fed took steps later in the week to show that they are taking the necessary precautions to provide liquidity in global credit markets, but the market still did not react favorably finishing down Thursday and Friday after rebounding slightly on Wednesday.
Swing systems holding short equity positions performed well last week as did day trading systems trading the foreign equities. Tzar finished up +$3,755 in the eRL, +$1,917.50 in the ES and +$1,163 in the NQ after holding short all week. BetaCon 4/1 Dax was the top performer of the day trading systems with profits of +$2,419.45 on two trades while BetaCon 4/1 ESX gained +$364.73 on two trades. Outside of the foreign day trading systems, the only system to profit was Waugh eRL which made +$110.
On the losing side, RT Viper YM lost -$173.97 on four trades for the week. McKenna YM traded for the first time in several months and lost -$403.70 per contract on a short trade. Compass SP lost -$1,250 while Rayo Plus Dax lost -$1,976.77. Seasonal ST ES and eRL lost -$1,075 and -$1,580 in open trade equity after entering long on Thursday. Finally, Ultramini YM and ES lost -$1,395 and -$1,497.50 respectively.
The soft commodity sector continued to be where the action was again last week as a strong foreign appetite for food stuffs along with the alternative fuel aspirations in the grains/oilseeds led to moves higher. Aberration is currently long Beanoil with a gain of $3680.00 (open trade), long Corn making +$1620.00 (open trade) and entered a long Sugar position making +168.00 (open trade). Relativity is currently long Canola making 882.00CD (open trade), long TGE soybeans making 139,000JY (open trade), ), long TGE corn making 6,000JY (open trade), long Beanmeal making +$1,430 (open trade), long Cocoa making +$230.00 (open trade), short Live Cattle making +$1010.00, and short Cotton losing -$120.00
The U.S. Dollar added to gains started two weeks ago as ideas have spread through the marketplace that the U.S. Fed may finally be near the point of turning around the sub-prime mess by taking more measures to protect not only institutions, but consumers as well. The continued corrections in inflation sensitive instruments like energies, metals and soft commodities also sparked Dollar support.. Long term trend followers remain in a negative mode toward the U.S. Dollar as Aberration is currently short DXZ currently making +$1992.00 (open trade).
Rate futures continue on their downward trek last week as the text of the US Fed meeting seemed to indicate that the Fed has renewed their worry of possible inflation. Long term trend followers have turned to a more neutral stance with Aberration currently long TY with a current gain of +$3456.25 (open trade), and Relativity going short the Euribor with a gain of +25.00E (open trade).
Please Login to: http://www.attainaccess.com for the latest updated statistics.
Important Risk Disclosure
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.