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Call us at 800.311.1145 to speak with one of our alternative investment specialists. We answer the phone in One Ring. Try It.Sign up to view performance on 100s of Managed Futures Programs, Trading Systems, and Managed Forex Programs. Sign up FREEWhat are Managed Futures? Is this the same as CTAs? How do I invest? Click here  to learn all of this and more on our extensive managed futures education pageHow to set watchlists? Build portfolios? Find correlations? and more. Click here to take a tour of our advanced toolsUse our most popular tool to create custom multi-program portfolios. Click here to get started today by signing up for FREE ACCESSClick below to learn how attain can assist your CTA in everything from back office creation and trade execution to finding a lawyer to create your D-DocNo upfront fees for managed futures funds is one of the unique benefits of a managed futures account at AttainOur alternative investment books list includes some of the most thought provoking and interesting books on alternative investmentsLearn how family offices outsource the managed futures research, due diligence, data collection, and ongoing monitoring of accounts to AttainWhat is a trading system? Who develops them, and how are they executed for client accounts? Our trading system education explains this and moreWe assist talented traders in getting their trading ideas into an automated trading system, do testing, marketing, and more

Trading Systems or CTAs - Picking a futures investment that's right for you

April 30, 2007

 

An oft quoted study published years ago by the Chicago Mercantile Exchange concluded that portfolios with as much as 20% of assets in managed futures yielded up to 50% more with comparable risk than portfolios of stocks and bonds alone. The graph in the chart of the week section below titled, "Impact of Incremental Additions of Managed Futures to the Traditional Portfolio," provided by the Chicago Board of Trade, shows that a traditional portfolio (55% stocks, 45% bonds, and 0% managed futures) presents an investor with the greatest risk and lowest returns. However, a portfolio comprising 45% stocks, 35% bonds, and 20% managed futures offers an investor the greatest returns and least amount of risk.

Of course, with the stock market at all time highs and some managed futures programs struggling - it sure doesn't seem like the time to be moving out of stocks into managed futures - but just imagine how well the people who did just that when we last hit all time highs in the stock market in March of 2000 did by diversifying into a different asset class at the top.

We all get bombarded by dozens, if not hundreds, of advertisements for futures based investments. Some of these even tell us to get this diversification potential by trading ourselves. But does trading futures on one's own necessarily equate to the diversification one can get trading "managed futures". If not, how does an investor go about picking what's right for them?

There are basically 2 types of futures investments.

  1. Self directed trading - That's when an investor makes all his/her own decisions and places their own futures trades through a broker or online.
  2. Managed futures - traditionally, that's where an investor selects a p[professional commodity trading advisor (CTA) to make the decisions for them. Over the past half decade - this has also come to represent investors selecting a trading system to be implemented for them.

It's our belief that you are not going to get the potential benefits outlined in the study quoted above trading on your own. That's because you may not be trading instruments or a style that is lowly correlated to the stock market and bonds - you may in fact trade futures on those instruments themselves. So to get those benefits - the first step is to look at a Managed Futures investment over directing a futures account yourself.

So that begs the question - how does one go about picking a managed futures investment? While there is no one general answer for everyone - we believe there are some guidelines which should be followed by all investors. First we must recognize that there are two main types of Managed Futures investments currently available - CTA's and Trading Systems, and look at some of the general differences between systems and CTA's. Keep I mind these are very broad generalizations.

CTAs:

CTA stands for a professional Commodity Trading Advisor. These types of accounts are managed by an individual or company, who takes discretion over your account and places all the trades in the client's account.

CTA's are often considered more conservative in that they have track records which are either audited or subject to audit by regulators. They also have disclosure documents which are subject to audit and submitted to the regulators. These "D-Docs", as we call them, contain detailed background information, the advisor's past performance, and a description of the trading strategy the advisor plans on implementing for your account.

As for the performance - CTAs generally have smaller drawdowns and smoother performance than systems. And CTA's usually have higher minimum investments than systems - sometimes as much as $1 Million. Finally - the cost structure of CTAs is usually set up where the CTA gets a 2% annual fee for managing the account (regardless of profitability), plus gets to keep 20% of the profits they make you.

Systems:

Trading Systems are computer programs which are usually executed on your behalf by a professional brokerage firm like Attain. Trading systems are merely a set of rules for trading a set market or many markets. The rules are coded onto a computer with market data running through it, and out shoot signals to buy or sell based on the rules. A system can be as simple as a buy at the market open, risk 5 points, and take a profit at 10 points.

Many CTAs actually use trading systems to manage accounts - so one of the big differences with Trading Systems as we are discussing them here is that the client is in control of the system. That is, the client can decide on which markets to run the system, with how many contracts, if they wish to skip a signal, and so on.

Systems are generally more volatile in the performance department, with the ability to make a lot of money - but also with the possibility of larger drawdowns than a manager might allow. As for costs, systems are generally paid for via a monthly or annual lease fee to the system developer. Finally, systems have a much lower barrier to entry - with no technical minimum except the margin required to hold the positions signaled by the system. A typical system minimum is between $5,000 and $50,000.

Comparing the two -

CTAs
Trading Systems
Generally for investors with more risk capital to invest - $100K - $1 MM
Generally for investors without enough capital for a CTA: $5K - $50K.
For investors who don't mind paying large fees (20% of profits) to the manager if they make $$
For investors who don't like to have to give up any profits - willing to risk more to keep more.
Generally have lower drawdowns and less volatility in returns
Generally have higher drawdowns and more volatility in returns
Better choice for hands-off investors, who invest with a year over year time frame
Better choice for hands-on investors, who invest with a shorter time frame of month over month
Work well in a portfolio combined with Trading Systems Work well in a portfolio combined with CTAs

 

While the above generalizations overstate the main characteristics somewhat, they can be good rules of thumb to follow. For example, an investor who doesn't like to pay fees and has more of a hands on approach may not like a CTA program which continues to charge a management fee each month even if they are not trading or in any positions. Similarly, an investor who is looking for a smoother equity curve (in a retirement account, for instance) may not mind what happens month to month in the account, as long as the year end lives up to his or her risk expectations.

I firmly believe that the key to successful investing is to balance these characteristics out. This is why many investors choose the portfolio approach. It is a way to layer different types of investments and risk/reward ratios with the goal of capturing higher returns with acceptable drawdowns. Ideally, the investor does not have to make a choice. They can incorporate both CTAs and Trading System into their investment strategy.

Pitfalls to avoid regardless of whether you choose a system or a CTA:

Avoid the get rich quick mentality. Most investors zoom in on the returns without studying the path it took to get there. The most successful investors study the drawdowns first because, regardless of the total profitability,-if the DD is too big, the investor won't be around for the turnaround. Remember, your biggest DD is always in the future-allow for that. In all aspects of life, records are always broken-drawdowns are no exception. Consider looking at the Sterling ratio, which measures average annual returns over average annual drawdown. A sterling ratio above 1.00 is a good benchmark.

Another common mistake is that investors get hung up on relatively meaningless statistics like a high trade wining percentage. Remember-a system that has a 99% accuracy level might feel comfy-but the reality is that 99 trades could each make $1.00 and the one loser might lose $200. I will give you a system which is guaranteed never to lose for free right now - "Buy tomorrow, exit when profitable". That system will win 100% of the time, but the drawdown could kill you.

Avoid a type of trading that goes totally contrary to your nature. You will be too uncomfortable to stick with it. For example, if you can't sleep because you are worrying about what might happen in the markets overnight-incorporate daytrades into your portfolio for those riskier portions. If you don't like the theoretically unlimited risk associated with short options - look to incorporate a CTA who takes outright futures positions.

Finally, be honest with yourself. What is it you reasonably expect? We are all looking for that magic investment bullet where we make 200% return a year with no drawdown. Get over it-it doesn't exist! If someone tells you it does-run-don't walk away from them. If you want help in designing investments that are the right fit for you-call or email us at 800.311.1145. It's what we do best! and we're happy to let you take advantage of our years of experience in the futures markets.

- Barbara Mueller

IMPORTANT RISK DISCLOSURE


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Feature | Week In Review: Commodities sell off in last week of April | Chart of the Week

***Overview***

US Stock futures continued to rally last week as investors continue to buy stocks at near record prices despite rising energy prices and weak economic reports. The market was spurred by another round of b earnings reports, increased M&A activity, and stock buy back announcements. Tech stocks led the charge with NASDAQ futures gaining +2.38% followed by SP futures which were up +0.60%, SP Midcap futures rallied +0.54% higher, while Russell 2000 futures remained unchanged for the week.

Energies rallied as well after Saudi officials reported they had thwarted a terrorist attempt to destroy oil fields in the kingdom. Crude Oil finished the week up +3.67%, RBOB Gasoline futures were up +7.10%, Natural Gas futures moved +4.22% higher, and Heating Oil futures gained +4.29%.

Elsewhere in commodity trading metals pulled back from their recent highs with Gold falling -2.01%, Silver was down -3.65%, High Grade Copper lost -2.44%, Platinum was down -3.59%, and Palladium moved -3.55% lower. The Tropical markets were hammered as well with Coffee losing -3.30%, Cotton was down -4.01%, and Sugar lost -3.06%. Grains had a slow week with Corn being the only significant mover at -1.93%. Finally in the meats Lean Hogs lost -3.91% and Live Cattle was down -1.08%.

***Commodity Trading Advisors (CTAs)***

On the whole, April was a very difficult month of trading for most option selling and counter trend CTA’s as trading ranges were tested in both the stock indices as well as several commodity markets. Quite the opposite was true for trend following CTA’s and non index options sellers who are all looking to post positive returns for the month.

The above commodity trend was the most challenging for Dighton – Dighton is currently running an open trade drawdown of aprox 30% based on their open positions. In speaking with Dighton they are aware of the magnitude of the current open trade drawdown; however also recognize that they have been here before (their program officially hit a 30% intra month drawdown twice last year). At the present they will be looking for a bounce and opportunity to scale out profitably.

In the S&P options market, World Capital and Argus were both caught short calls and will be citing drawdowns of 30-40% for the month. Both mangers have now had a chance to reassess the markets and will be getting back to work this week. Anyone invested in Argus please give us a call to review the changes to his program.

April was not all doom and gloom, however, as FCI returned aprox +7% with several successful trades spanning the Energy and Metals markets! Another bright spot was Zenith which continued to successfully work its way on to new equity highs in the Index Options program and turn a positive month for the Diversified. Zephyr ended slightly down after giving back some open trade profits mid-month with the market run up forcing him to roll out of several of his call positions (markets were up aprox 3 weeks in a row with only 3 down days including today).

Elsewhere, preliminary reports from CTAs which contain a trend following component were forecasting a positive month for the likes of Nu Wave Investment Corp and Attain Portfolio Advisors.

***Day & Swing Trading***

U.S. stocks continued to march into record territory last week, proving the contrarians wrong once again at least for now. Unfortunately, trading systems are starting to see these levels as overbought and are generally selling in the area of 1500.00 in the S&Ps and 1900.00 in the ND. Eventually, we are going to see some type of profit taking run to the downside, so it will be important for swing systems to be able to wind out of their long positions before its too late and for day traders to be active in the weeks to come in search of the “home run†trade.

A handful of day traders did catch some of the upward momentum last week - though it was few and far between. Compass SP was the top performer with profits of +$1,487.50 on two trades for the week. BWT Zones Classic SP came in next with gains of +$575 for the week. All of the systems trading the Dax including Omega3v1, Phi Plus and Rayo Plus underperformed losing between -$500 and -$1,300.

The swing systems that are holding long added some open trade equity to their current positions, though gains were somewhat limited compared to the week prior. Systems that were long heading into the week made +$450 in the ES and +$110 in the eRL. This includes SeasonalST ES, Tzar ES, SeasonalST eRL and Tzar eRL. Tzar NQ has hit a rough patch in the past few months and was stopped out of its short position for a loss of -$998.42 on the closed out trade. Mesa Notes continues to hold long in the Ten Year Note and was down -$156.25 for the week.

***Long Term***

Rate futures drifted lower last week as market forces continue to spar over whether the U.S. economy continues to grow at a decent pace versus a slowdown sparked by the worst U.S. housing slump in a decade. The uncertainty in sector continued as the assortment of economic releases did little to garner any b action one way or the other as some did show economic growth, but others pointed to a slowdown. Government releases for the coming week again look to be growth sensitive readings which could spark a breakout of the recent sideways trend if they back up the results of past few weeks’. The recent volatility and lack of trend has kept long term systems to the sidelines for the time being searching for a breakout of a new trend, although Aberration is short the June Bund and currently about even (Open Trade).

Another week of the same results in the currencies as choppy activity was again the norm with recent trends present on ideas that economic growth in Europe is outpacing other world sectors. Speculation of higher interest rate movement in Europe versus the major international players kept the Japanese currency (8-week Lows) and the U.S. dollar (near record low vs. EU) in a sideways to lower trade. The Europeans continued to find strength on higher interest rate moves for both the Euro countries and the U.K as those currencies moved to new multi-month highs. The recent volatile swings have kept long term trend followers on the sidelines, although Aberration remains short the DX with a gain +$490.00 (open trade).

Plenty of volatility but near steady closes for most grains and oilseeds last week as weather was the dominating factor with an early week rally on planting delay fears that subsided late week on weather forecasts calling for warm dry conditions. Wheat volatility was also very high as the market continues to filter through reports that the Easter freeze in the wheat belt did more damage than was earlier suspected. Aberration is currently long BO making +$604.00 (open trade), and Short CTN making +$1,775.00.

Please Login to: http://www.attainaccess.com for the latest updated statistics.

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.