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

April 2, 2007

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 Zenith Resources Index Option program since inception in December 1999. 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 400% since inception.

But the investor with the $6,000 "head start" because they didn't pay the up front fee, earned 5.90% of $100,000 in the first month, or $5,900, while the investor who paid the load only earned 5.90% on $94,000, or $5,546. 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 $511,431 today, versus just $480,745 for the investor who did pay the fee. That's a difference of close to $31,000 !! I don't know about you - but I could sure use an extra $31,000 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
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.

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The Week in Review

***Overview***

The energy markets were back in the spotlight in March as tension in the Middle East propelled futures higher. The well documented Iran-Britain saga and its effects on energy prices worldwide gave crude oil traders momentum that hasn't been see since last year. Crude futures rallied +3.95% higher for the month, with the majority of the upward move occurring in the last few days of trading. Perhaps even more impressive was the RBOB Gas market - which saw prices rise +11.35%. Heating Oil futures were also up rallying +5.62% and Natural Gas futures followed suit moving +4.23% higher.

US Stocks were up slightly for the month, after a very volatile month of trading. SP 500 futures had a trading range of just over 75 points for the month - that included six days with at least a 20 point range. When it was all said and done, however, SP futures climbed only +0.69% for the month. NASDAQ futures were also slightly higher gaining +0.28% while Dow Jones futures moved +0.65%. Small Caps were also up a little with Russell 2000 futures gaining +0.87% and SP Midcap 400 futures trading +0.95% higher.

Elsewhere in commodity trading, grains were down for the month after Fridayâ€™s quarterly planting intentions reports. As expected with the increased focus on ethanol, more farmers are looking to plant corn for the upcoming year, causing corn futures to trade limit down on Friday. For the month Corn was down -8.69%. The selling trickled over into Wheat -10.25% and Soybeans -6.44% as well.

Other markets on the move in March included the meats; which saw Lean Hogs which fall -4.01% and Live Cattle rally +1.52%. In the metals High Grade Copper had a huge month gaining over +14%! Silver dropped -5.51% and Gold fell -1.44%.

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

March may have been the most challenging trading environment CTA investors have seen in years. With Stocks falling sharply to start the month, then rallying all the way back near new highs, only to then head lower again, and Energy markets giving no sense of the direction, and then rallying 5%+ in the last week of the month - CTA managers had their work cut out for them.

The stock index action noted above left option selling CTAâ€™s working to limit their exposure and risk by exiting nearby positions and in some cases rolling out to further out strikes. Although most CTAâ€™s do not report as early as the first trading day of the next month, Zenith Resources (one of the most tried and true managers in the game) has posted an estimate of +3.4% in his Index Options program and -0.56% in the Diversified - showing that it wasn't all bad for option sellers in March. In general, those option selling CTAs holding more Put positions - Diamond, Crescent, Zenith, and Zephyr did well in March - while those holding any call positions (Argus, World) suffered some open trade losses which pushed returns negative for March. Weâ€™ll be updating our website with others as the reports come in.

In the Energy markets, Phoenix Energy had an active month,. seeing an early drawdown followed by gains of approximately $10,000 per $150,000 invested in the last week of the month to finish up approximately +3.76% for March.

Overall, we were pleased with how each of the CTAs handled the volatility of the past few weeks of trading and risk management! Moving forward the market environment appears to be making a shift toward higher volatility which plays well into a majority of the strategies we track and recommendâ€¦If you are thinking of getting started or adding more capital the timing does not get much better than now.

***Day & Swing Trading***

Day trading performance was mixed in March as the huge swings in the stock market proved profitable for some systems while others struggled. BWT Zones SP was the easy winner for the month amongst day traders after taking in profits of $10,800 per contract. This system is known to thrive in volatile conditions and March proved to be a great time to trade BWT.

Other systems with profitable months included the Bounce programs which made +$452 per contract in the eMD and +435.80 per contract in the eRL. Impetus eRL also had a nice winning month with profits of +$1100.00 per contract, while in the DAX - Rayo Plus DAX made +275 Euros per contract and Omega 3v1 DAX made +250 Euros per contract.

Systems that finished the month in the red included the venerable Compass SP which lost -$3457.00 per contract. OPXP eRL was also down for the month losing -$564.43 per contract and Russell Daytrade lost -$80.00 per contract. Losing European systems include Phi Plus DAX which lost -5287.50 Euros per contract and Beta Con ESX which lost -600 Euros per contract.

Swing trading performance was also mixed with Adaptive US leading the way at +3452.42 per contract. Other systems with profitable months include Tzar ES which made +2340.00 per contract and Tzar eRL which was up +$630.00 per contract. Bounce Swing eMD made +$504.00 per contract and Bounce Swing eRL made +$435.80 per contract. Finally JAWS squeaked out profits of +$44.74 per contract in the US Bond market.

Systems with negative returns include SeasonalST eRL -$4620 per contract and SeasonalST ES which lost -$2550 per contract after nearly all seasonal tendencies evaporated from the market during the beginning of the month. AG Mechwarrior suffered its first losing month since returning to Attain losing -$775.00 per contract. Tzar NQ finished the red as well losing -$170.00 per contract. Finally Adaptive Euro struggled mightily losing -7850.00 Euros although it did make +1395.00 Sterling for the month.

***Long Term***

March was a mostly quiet month for Long Term systems as most markets spent the month consolidating or in a transitional mode after trending moves in January. A few markets did actually have decent moves, but most Long Term systems they like to see a concrete trend develop before entries are made. Market worries on the welfare of world economies and nervousness about Middle East events (read Iran) led to choppy and very volatile action which usually isnâ€™t conducive to b trends or trend followers. Other sectors like the livestock and soft commodities did see some movement and signs of new possible trends as end of the month Quarterly USDA reports seemed to spark some new ideas for market participants.

The grain markets did see some price adjustments at the end of the month as the USDA quarterly planting intentions report sparked action on ideas that 90 million+ acres in projected corn plantings would come mostly from soybean acres. This should make for an interesting trade in this complex for the month ahead - which could also be ripe for weather turmoil as well with most of the Midwest very wet heading into corn planting season. Aberration is long Bean oil with a gain of +970.00 (open trade) and was stopped out of the short CT with a loss of -$1390.00 per contract. Aberration is also long LC with an open trade profit of +$780.00.

The interest rate sector gave back some of the previous months gains due to more favorable U.S. economic reports, but the Fed did change some wording in their minutes from their monthly meeting which did spark ideas of possible easing in the not too distant future. March was very quiet as far as long term systems go as no new positions were entered as current market conditions seem to be keeping the long term trend followers on the sidelines for now.

March continued to be a tough trade for currencies as both economic and geo-political uncertainty kept this sector very choppy and lacking a b trend. The Japanese Yen which did have a decent bounce in February from levels not seen since 2003 started to head back to that territory in March as a soft economy continues to hamper the stability of the currency. Aberration was stopped out of its short position early in March with a loss of-$675.00 per contract.

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