Commodity Trading Advisors - dummies

By Amine Bouchentouf

If you’re interested in investing in commodities through the futures markets or on a commodity exchange, getting the help of a trained professional to guide you down this path is always a good idea.

One option is to hire the services of a commodity trading advisor, or CTA. The CTA is like a traditional stockbroker who specializes in the futures markets. He can help you open a futures account, trade futures contracts, and develop an investment strategy based on your personal financial profile.

Here are some helpful resources for finding the right CTAs:

Each CTA has his own investment approach and trading philosophy. Before you select a CTA, find out about each candidate’s investment style to see whether it squares with your investment goals. You also have to decide how much of a role you want the CTA to play in your investment life. Do you want someone to actively manage your funds or simply someone who will give you advice?

Consider these points when looking for a CTA:

  • Track record: Websites like Autumn Gold and IASG rank CTAs by their historical track record. You should look at the longest historical track record, which is the annualized return since the CTA began trading. It can also be useful to look at one-, three-, or six-month returns, as well as one-, three-, and five-year annualized returns.

  • Disciplinary actions: The National Futures Association (NFA) maintains a comprehensive database of all registered CTAs, including a record of any disciplinary action the CTA may have faced. Make sure that the CTA you may be doing business with has a clean record. An additional resource is the National Association of Securities Dealers (NASD), which also maintains a comprehensive database of CTAs and other securities professionals.

  • Management fee: Similar to most money managers, most CTAs charge a flat management fee. The industry average is 2 percent, although, depending on their track record, some CTAs charge higher management fees. These fees generally go toward operational expenses: paying employees, taking care of rent, mailing and printing marketing material, running a trading platform, and so on.

  • Performance fee: Although a large portion of the management fee goes toward running the CTA’s business, the performance fee provides an incentive for the CTA to generate the highest returns possible. Again, performance fees differ among CTAs, although 20 percent seems to be a benchmark for most CTAs.

    Some CTAs with good track records may have higher performance fees, in which case you want to be aware to look for the one with the highest distribution back to investors. If the CTA doesn’t reach certain levels, she shouldn’t get any performance fee. In other words, the CTA should be rewarded only for good performance.

  • Miscellaneous fees: Watch out for these fees, because they can add up really quickly.

  • Margin requirements: If you decide to open a margin account (as opposed to a cash account), you can borrow money from your CTA to purchase securities. Buying on margin gives you a lot of leverage (on both the upside and the downside), so knowing the details of the margin requirement is absolutely critical.

  • Minimum investment requirement: Many CTAs require that you invest a minimum amount of money with them. You should invest no more than 5 to 10 percent of your investing capital with a CTA.