Commodity Pools - dummies

By Amine Bouchentouf

Another way you can get access to the commodities futures markets is to join a commodity pool. As its name suggests, a commodity pool is a pool of funds that trades in the commodities futures markets. The commodity pool is managed and operated by a designated commodity pool operator (CPO), who is licensed with the National Futures Association and registered with the Commodity Futures Trading Commission.

All investors share in the profits (and losses) of the commodity pool based on how much capital they’ve contributed to the pool.

Investing in a commodity pool has two main advantages over opening an individual trading account with a Commodity Trading Advisor (CTA). First, because you’re joining a pool with a number of different investors, your purchasing power increases significantly. You get a lot more leverage and diversification if you’re trading a $1 million account as opposed to a $10,000 account.

The second benefit, which may not seem obvious at first, is that commodity pools tend to be structured as limited partnerships. This means that, as an investor with a stake in the pool, the most you can lose is the principal you invested in the first place. Losing your entire principal may seem like a bad deal, but for the futures markets, it’s pretty good!

With an individual account, you can borrow funds to buy futures contracts. If the position you entered into with the borrowed funds does the opposite of what you expected it to, not only have you lost your principal, but you also have to pay back your broker who lent you the money to open the position. You lose your principal and you still owe money.

Now, because commodity pools are registered as limited partnerships, even if the fund uses leverage to buy securities and the fund gets a margin call, you’re not responsible for that margin call. Hence, the only capital you risk is your principal! Of course, you want to perform due diligence on the CPO to keep the likelihood of the pool going bust as small as possible!

A good place to start looking for commodity pools is Commodities Investors LLC.