Risk of Losing More than Investment with a CTA?

Corso482 · Jul 5, 2005

So as I understand it, most CTA's have you open an account with an FCM, then you sign over power of attorney, and then they trade your account, leaving you completely liable for all losses, which, presumably, includes losses greater than the money you've put into the account.

So has this ever happened? Has anyone been thrown into debt from a managed CTA account?

5yrtrader · Jul 5, 2005

Most people would set up the account through an LLC so they wouldn't be liable for any losses beyond their original investment.

Corso482 · Jul 7, 2005

Quote from 5yrtrader:

Most people would set up the account through an LLC so they wouldn't be liable for any losses beyond their original investment.

Are there a lot of brokerage companies amenable to setting up accounts with LLC's?

5yrtrader · Jul 7, 2005

I think all professional traders, especially futures traders, incorporate themselves under an LLC.

vulture · Jul 7, 2005

Quote from Corso482:

Are there a lot of brokerage companies amenable to setting up accounts with LLC's?

Pretty much all of them these days...

Back to the original question. Most CTA's deleverage themselves significantly. You would want to look at the CTA's MER Ratio to get a feel for their leveraging. I suppose if you invested with a manager trading commodities unhedged and got stuck in some lock limit market, there could be problems.

Corso482 · Jul 8, 2005

Quote from vulture:

Pretty much all of them these days...

Back to the original question. Most CTA's deleverage themselves significantly. You would want to look at the CTA's MER Ratio to get a feel for their leveraging. I suppose if you invested with a manager trading commodities unhedged and got stuck in some lock limit market, there could be problems.

I was thinking more notional funding.

5yrtrader · Jul 14, 2005

Quote from vulture:

Pretty much all of them these days...

Back to the original question. Most CTA's deleverage themselves significantly. You would want to look at the CTA's MER Ratio to get a feel for their leveraging. I suppose if you invested with a manager trading commodities unhedged and got stuck in some lock limit market, there could be problems.

I think you mean MAR not MER, and the sharpe ratio is the typical measurement for how leveraged a fund is. With notional funding there is a risk of losing your more than your whole investment even if you are a LLC.

Free Thinker · Jul 14, 2005

Quote from Corso482:

So as I understand it, most CTA's have you open an account with an FCM, then you sign over power of attorney, and then they trade your account, leaving you completely liable for all losses, which, presumably, includes losses greater than the money you've put into the account.

So has this ever happened? Has anyone been thrown into debt from a managed CTA account?

yes i had a cta lose more than my account years ago. the only good thing is it was a tiny amount that gave me the knowledge to avoid those guys.

mschey · Jul 14, 2005

Quote from 5yrtrader:

I think all professional traders, especially futures traders, incorporate themselves under an LLC.

Dumb move IMO.....why would a futures trader give up the tax benefits associated with trading that instrument?

JayS · Jul 14, 2005

I remember one that lost more than was put up (for some of the investors) back in the late 90's, I think they were selling NG calls when it went to $9-$10 overnight. Something like selling $100 calls way otm near expiration that went to like $5000 the next day.