CTA Startup
- Thread starter BGB
- Start date
Brokers rarely get into the situation of having to collect from clients. The whole idea of the performance margin system is to be sure there is enough cash in the account to cover likely losses. The likely scenario is that, as an account loses money and doesn't have enough cash to meet margin requirements, is that the broker will unilaterally close out positions to a) make it possible to meet the margin requirements, and b) to stem the losses. The broker will close out positions while the account balance is still positive so it doesn't go into the red.
This is not the reality. Notional funding is not limited to 50%, but can be as high as the client can negotiate with the FCM.
jj
The account opening documents that the client sends to the broker are going to require that the client agree to cover any losses above and beyond the cash in the account. There is no "promissory note" or other agreement between the CTA and the client.
The CTA's disclosure document (that the CTA gives to the client) will again emphasize that futures trading is very risky and the client can lose more than their original investment. Here's what the NFA requires CTA's to put on the first page of the ddoc:
The capitals are actually required by the NFA, as I recall. And the NFA prescribes this exact wording.
The wise CTA will also reiterate in its separate account management agreement that it is the client who is responsible for losses, not the CTA, even if those losses exceed the account balance. Here's the clause from Schindler Trading's management agreement:
In short, you can't overemphasize the risks to your investors enough.
Another key aspect of notional funding is the performance/mgmt fee paid to the manager. The fees paid are based on the notional funds, not the actual funds. The NFA requires a chart be included in the disclosure docs detailing the effective rates at different levels.
If you have 25K on deposit and wish that it be traded as 100K, with a 2/20 fee structure (based on 100K) your fees could dramatically impact the return depending on the manager's performance. Let's say the manager makes (gross) 5% that month. That's 5K + $166, the manager keeps $1,166 and you get 4K, or a 16% return...not bad. Had the account been traded as 25K, the same numbers would be $1250 +$42 and the manager would only get paid $292, and you would make 4% for the month.
On the losing side, with 100K, a 5% loss becomes $5,166, or over 20% of the 25K account. Traded as 25K, the 5% loss would be $1,292.
The financial upside certainly benefits everyone when things are going well. But if things turn south, it could be bad in a hurry.
When you are above the high water mark, 4X becomes 3X in upside potential, but the downside is felt dollar for dollar.
If you have 25K on deposit and wish that it be traded as 100K, with a 2/20 fee structure (based on 100K) your fees could dramatically impact the return depending on the manager's performance. Let's say the manager makes (gross) 5% that month. That's 5K + $166, the manager keeps $1,166 and you get 4K, or a 16% return...not bad. Had the account been traded as 25K, the same numbers would be $1250 +$42 and the manager would only get paid $292, and you would make 4% for the month.
On the losing side, with 100K, a 5% loss becomes $5,166, or over 20% of the 25K account. Traded as 25K, the 5% loss would be $1,292.
The financial upside certainly benefits everyone when things are going well. But if things turn south, it could be bad in a hurry.
When you are above the high water mark, 4X becomes 3X in upside potential, but the downside is felt dollar for dollar.
If you grow out of an Exel or Quicken solution for managed accounts, other solutions might be:
DMAXX LLC
www.dmaxx.com
Omni Fund
http://www.omnimath.com/html/software.html
DMAXX LLC
www.dmaxx.com
Omni Fund
http://www.omnimath.com/html/software.html
Good, info, Aaron. Thanks.
My question is this: Do investors in CTA Funds have to be "qualified" investors as is the case for hedge funds? Also, are there fund of CTA funds, just like there are fund of hedge funds? Seems like that would be a good way to invest in CTAs and spread the risk. I assume that in some cases these fund of funds overlap and invest in both hedge funds and CTAs. I'm not always sure of the distinction between a hedge fund and a CTA fund. Are CTAs restricted to investing in futures whereas hedge funds can invest in anything?
Thanks again. Good luck this year.
My question is this: Do investors in CTA Funds have to be "qualified" investors as is the case for hedge funds? Also, are there fund of CTA funds, just like there are fund of hedge funds? Seems like that would be a good way to invest in CTAs and spread the risk. I assume that in some cases these fund of funds overlap and invest in both hedge funds and CTAs. I'm not always sure of the distinction between a hedge fund and a CTA fund. Are CTAs restricted to investing in futures whereas hedge funds can invest in anything?
Thanks again. Good luck this year.
With the exception of family money as seed capital when starting out, I've never traded OPM, nor have I really given thought to it. But I'm curious to know if managing outside capital is really the ultimate goal of most if not all individual traders out there?
Hypothetically, if one were to start out with a relatively small account trading on his own, and over a few years was able to achieve very good results (say 100k into 1mil in 3 years trading futures), would it be in that person's interest to seek outside capital? With 1mil in personal capital, he or she would not necessarily need more money to generate a decent level of income, yet would that person be "stupid" not to take advantage of a good track record and possibly obtain a much larger capital base to trade with, simultaneously preserving his own wealth from that ever-present risk of blow-out, however small it may be? If one had no psychological hangups about trading outside money, what would be the drawbacks or disadvantages in using OPM? Should everyone try to obtain OPM if given the chance?
Great thread and thanks!
Hypothetically, if one were to start out with a relatively small account trading on his own, and over a few years was able to achieve very good results (say 100k into 1mil in 3 years trading futures), would it be in that person's interest to seek outside capital? With 1mil in personal capital, he or she would not necessarily need more money to generate a decent level of income, yet would that person be "stupid" not to take advantage of a good track record and possibly obtain a much larger capital base to trade with, simultaneously preserving his own wealth from that ever-present risk of blow-out, however small it may be? If one had no psychological hangups about trading outside money, what would be the drawbacks or disadvantages in using OPM? Should everyone try to obtain OPM if given the chance?
Great thread and thanks!
Do investors in CTA Funds have to be "qualified" investors as is the case for hedge funds?
Only accepting "Accredited" or "Qualified Eligible Persons (QEP)" is not a requirement for CTA/CPOs. If you elect to accept non-accredited investors, there are more disclosure requirements and a more intense review of your documents from the NFA. The rationale for this is that by accepting only Accrediteds and QEPs, that they can look out for themselves.
Are there fund of CTA funds, just like there are fund of hedge funds? I have seen very few funds of CTAs exclusively. Most try to diversify beyond the CTA/CPO scope.
Are CTAs restricted to investing in futures whereas hedge funds can invest in anything? CTA/CPOs (and hedge funds) are not restricted in any way in what they may trade or invest in except to the extent that registration may be required. Futures are the primary vehicle for CTAs and the NFA, CFTC and Series 3 cover those products. If a CTA decides to trade equities and other products with Fund money, he may come under "Investment Advisor" regs with states or the SEC. It's OK to do such a thing, provided you understand the rules and the regulatory bodies who oversee each type of product. Staying within futures is pretty clean and keeps things simple. The guys I've talked to would likely open a separate fund to trade something else or a different system/method.
The term "hedge fund" is a catchall for anything that is not a mutual fund. Most people have never heard of a CTA. The media refers to CTAs as hedge funds all the time. If you were to break it down, I would say that CTAs are a category of hedge fund, then there are about a dozen styles of CTAs. Another important distinction, under current regs the SEC generally does not get involved in regulating CTA/CPOs provided they trade only futures products, regardless of size.
Just as CTAs can run into registration issues if they trade equities, non CTA funds can be subject to NFA regs if they trade futures.
Hope that helps.
Quote from illiquid:
With the exception of family money as seed capital when starting out, I've never traded OPM, nor have I really given thought to it. But I'm curious to know if managing outside capital is really the ultimate goal of most if not all individual traders out there?
................
If one had no psychological hangups about trading outside money, what would be the drawbacks or disadvantages in using OPM? Should everyone try to obtain OPM if given the chance?
Great thread and thanks!
You make some good points, there is much to consider. If you do the math, the possibilities with OPM vs. your own $$$ are much greater. Of course, this is based on positive results and consistent market beating performance, which everyone assumes they will have when they decide to accept OPM. The fact is, if you are good at consistently beating the market, have all your regulatory ducks in a row and can run a small business, then you have a shot. If you watch some of the little CTAs on the major databases, it appears that some start with under 100K and after about 6 months to a year of decent performance, they start to see a few 6 figure inflows. I believe that if you really perform, that people will throw more money at you than you can handle.
Let's say you have 1M in your Fund and others have given you 5M and your fees are 2/20. If you make 5% this month, you get to keep the 50K in personal profits, PLUS you get another 50K from the 250K profit on the 5M, plus another 8K in mgmt fees. Some of that extra money goes to overhead and cost structures associated with the business, but there is still much more to plow back into your personal stake than you would have had otherwise.
The downside is considerable as well. You have to deal with the partners, hold some hands, fend off many people trying to steal your methods who don't want to invest with you, beat away sales guys and soft dollar pushers, keep all the paperwork and compliance issues straight...oh yeah...and keep making money all day long.