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Are these numbers real? And 7.5 other questions on CTA performance

January 22, 2007

 

With many of Attain's investors looking more and more into investments with professional Commodity Trading Advisors (CTAs), we have been fielding many more questions from our newsletter readers regarding the performance of these advisors.

1. Are these numbers real? (Is the performance audited? Are there any other controls on the performance these CTAs post? )

The short answer is YES, CTA's performance numbers are real. They represent the composite performance of all accounts managed by the CTA trading that specific program. As for the results being audited - a CTA must submit an updated Disclosure Document which includes updated performance to the NFA(www.nfa.futures.org) every 9 months for review, and the performance listed in said Disclosure Document is audited during periodic (every 2-3 years) on site audits by the NFA. Some advisors also employ outside auditors to give investors an extra level of comfort. And finally - there are firms like Attain who see the performance in actual accounts of their clients and confirm the clients are getting the same performance as that posted by the CTA.

2. What about larger CTAs who may have 100s of accounts, won't these accounts have different performance?

CTA performance results are the composite results of all accounts managed by the advisor. Composite means all of the accounts being traded by a specific program are considered together when computing the performance. If the sum of all the accounts is $100 Million heading into the month, and $110 Million at the end of the month (assuming no fees, additions or withdrawals) the composite performance would then be a positive +10%

In practice, some accounts will do a little better and some a little worse form month to month, due to split fills and other factors - but these differences are usually small (less than 1%) and balance back out in the next month. Per the rules, however, CTAs must insure their fill allocations are done in a fair and balanced manner, and cross test their accounts periodically to make sure no one account or set of accounts is consistently getting better fill prices and therefore better performance. In our experience at Attain, all of our client's accounts are very close in terms of % return month to month, and even closer on a year to year basis.

3. Is it possible for a CTA to show only the performance of the best performing account(s) as the entire program’s performance?

As the old line goes - anything is possible, but reporting performance which isn't representative of the overall performance of investor's following the program is illegal. Per the rules, they must show performance which is representative of all of their accounts - no matter the size, fee structure, or performance - as long as those accounts are all following the same program. If a CTA broke the rules in such a manner, they would likely incur a big fine and lose their license to manage client accounts when they got audited.

4. One CTA Disclosure Document states: “Our accounts pay between $15 to $30 per round turn in commission depending on the broker.” Is the performance calculated using the lower commissions cost? If paying $ 30 per round turn, will the performance be significantly less?

CTA's reported performance is, by definition, representative of all the accounts of the manager (a composite of all accounts), thus would be calculated using the commission rates of all clients. That means the performance will roughly come out at the average commission rate. For more established CTAs with more assets under management, that rate is usually at the higher end of the range - for smaller CTAs who started their track records with in house or proprietary results - that average can usually be towards the lower end of the range. In general, however, a CTA will not allow a broker to charge a commission amount that will cause that client's performance to be significantly different from the composite performance.

5. Will you see the same performance if only doing the minimum investment amount?

This isn't Vegas - if you're doing just the minimum amount with a CTA, you don't need to worry about not getting VIP treatment. The CTA must treat all accounts equally, and have a method in place for allocating fills evenly between his/her largest account and those accounts at the minimum.

When a CTA puts on a trade for say, 100 clients, they put in one bulk order, not 100 separate orders, and then have the trade allocated according to how many each of the 100 clients should have based on their account size. And many CTAs use the average price system - which gives all clients, regardless of account size, the average fill prices across all accounts.

About the only benefit to be a larger account is the remote possibility of discounted fees with some CTAs, however an individual usually must become one of their largest clients to qualify for such a discount.

6. Do Max DD amounts represent the worst its been during the month, or just on an end of month basis?

This is an important question - and one many investors miss. Unlike trading systems, where we can measure intramonth drawdowns - CTA performance is reported on a month end basis. So, there is the very real possibility that the intramonth Max DD is actually bigger than the reported Max DD.

Many CTAs do this deliberately - as it encourages people to allow the investment to run its due course and not get too focused on the day to day volatility of the account. But part of Attain's due diligence process is to ask for reports on the worst intramonth Max DD in addition to the reported end of month Max DD. Whether the intramonth number is significantly higher (2x to 3x) or not, that's something we're going to pass on to our clients.

7. Why are the results for NDX Capital different on your site vs many other websites tracking CTA’s?

In investing, it's always important to read the footnotes. NDX bases their reported returns on a non-compounded basis. That is, they assume the account is brought back to the initial capital level each month, and then show how the account did that month based off that initial capital. All other CTAs we know of base their returns on a compounded basis. That is, they show how the account does month to month on the growing (or shrinking) account balance.

What is most likely going on with other websites, is that they are taking the monthly numbers of NDX, and compounding them - showing exaggerated annualized returns and annual numbers. Through our due diligence process we recognized that there was a discrepancy between NDX’s disclosure document and the reporting on several other industry databases. The lesson learned in this instance is that investors should always consult with someone like Attain to confirm how the CTA will be managing profits or losses in the account.

8. How are the recommended CTAs on Attain's site chosen? Is it possible to trust them?

We choose CTAs by looking at BOTH performance and the advisor themselves. In regards to performance - we look at hundreds of CTA's and dismiss most of them because we don't like something. Perhaps they take fees that we feel are too large or the drawdowns have been so big that regardless of performance, we don't think they are worth the risk. In regards to getting to know the advisor, we do our best to meet personally, face to face with each of the CTAs we recommend.

As for whether you can trust them — these are registered individuals who disclose their personal backgrounds, work history, and are subject to a background check by the CFTC for any securities related fraud. It is possible for you to check on the background of the advisors yourself on the NFA web site as well to see if there have been any customer complaints , fines, or sanctions against them. The site is: http://www.nfa.futures.org/BasicNet/?aspxerrorpath=/basicnet/Search.aspx.

So, we are apt to trust the ones who have been in business for years and don't have any marks on their record, and believe you should too. The other thing to consider is that CTA's get most of their money from incentive fees (a portion of the profits). So it is not in their interest to deceive you in any way that would cause you to lose money. If the customer doesn't make money, they don't make money.

8 1/2. Are there any lock up periods for my funds invested with a CTA?

While this one doesn't deal specifically with performance — many investors like to know how fast they can get at their money. Technically speaking, because a CTA investment is done through an individually managed account - your account is 100% transparent and liquid within a days time. However, each advisor does have termination guidelines that investors sign off on before getting started. Some advisors may technically have up to 30 days to exit all existing positions.