How to Check Out Commodity Managed Funds and Futures Contracts - dummies

How to Check Out Commodity Managed Funds and Futures Contracts

By Amine Bouchentouf

Many investors buy on hype; they hear a certain commodity mentioned in the press, and they buy just because everyone else is buying. Buying on impulse is one of the most detrimental habits you can develop as an investor. Before you put your money into anything, you need to find out as much as possible about this potential investment.

Commodity managed funds

If you’re not a hands-on investor or you simply don’t have the time to actively manage your portfolio, you may want to choose a manager to do the investing for you. You can choose from a number of different managers, including the following:

  • Commodity mutual fund: Manager of mutual funds that invest in commodities

  • Commodity pool operator: Manager of group futures accounts

  • Commodity trading advisor: Manager of individual futures accounts

Before you invest with a manager, find out as much as you can about him. Ask a few questions:

  • What is the manager’s track record?

  • What’s his investing style? Is it conservative or aggressive, and are you comfortable with it?

  • Does he have any disciplinary actions against him?

  • What do clients have to say about him? (It’s okay to ask a manager if you can speak to one of his existing clients.)

  • Is he registered with the appropriate regulatory bodies?

  • What fees does he charge? (Ask whether some fees aren’t disclosed: Always watch out for hidden fees!)

  • How much in assets does he have under management?

  • What are his after-tax returns? (Make sure that you specify after-tax returns, because many managers post returns only before taxes are considered.)

  • Are minimum time commitments involved?

  • Are penalties assessed if you choose to withdraw your money early?

  • Are minimum investment requirements applied?

Commodity futures market

The futures markets play an important role in the world of commodities. They provide liquidity and allow hedgers and speculators to establish benchmark prices for the world’s commodities.

If you’re interested in investing through commodity futures, you need to ask a lot of questions before you get started. Consider some of these questions:

  • On what exchange is the futures contract traded?

  • Is there an accompanying option contract for the commodity?

  • Is the market for the contract liquid or illiquid? (You want it to be liquid, just in case you’re wondering.)

  • Who are the main market participants?

  • What’s the expiration date for the contract you’re interested in?

  • What’s the open interest for the commodity?

  • Are there any margin requirements? If so, what are they?