Managed Commodity Accounts - dummies

By Amine Bouchentouf

In a managed commodity account, you’re essentially transferring the responsibility of making all buying and selling decisions to a trained professional instead of making those choices yourself.

Open a managed account in these cases:

  • You don’t follow the markets on a regular (that is, daily) basis but are interested in getting exposure to commodities.

  • You follow the markets regularly but are unsure about which trading strategy will maximize your returns.

  • You don’t have the time to manage a personal account.

  • You feel comfortable knowing that someone else is making trading decisions for you.

If these statements apply to you, you’re ready to open a managed account. So how do you get started? First, you need to determine your investment goals, time horizon, and risk tolerance. Then you need to find out about any minimum capital requirements, commissions, or management fees you may face. When you have this information, you can move on to choosing a commodity trading advisor (CTA) to manage the account.

If you have mutual funds, the CTA is similar to a fund manager. The FCM, on the other hand, is more like a stock brokerage house. The FCM provides you with a trading platform, whereas the CTA actually manages your accounts for you.

A CTA is a securities professional who is licensed by the National Association of Securities Dealers (NASD) and the National Futures Association (NFA) to offer advice on commodities and to accept compensation for investment and management services. Before you select a CTA, perform a rigorous background check.

Because a CTA is required to register with the NFA to transact with the public, you can find out a lot about a CTA by simply visiting the NFA website.

You want to find out this info about your CTA:

  • How many years of market experience does he have?

  • What is his long-term performance record?

  • What is his trading strategy, and does it square with your investment goals?

  • Does he have any complaints filed against him? (This information is publicly available through the NFA.)

  • Many CTAs manage more than one account. Try to find out how many accounts he’s currently managing. If the number seems too high (more than 100), maybe your account won’t be a high priority for him.

  • Does he have a criminal record? If so, find out the details of any arrests or convictions he has. This information is also available through the NFA.

If you perform due diligence on your CTA and feel comfortable with him, you’re ready to turn over trading privileges to him. How do you do that? You have to sign a power of attorney document.

After you sign that document, your CTA gets full trading discretion and complete control over the buying and selling of commodities in your account. He then makes all the decisions, and you have to live with the good (and sometimes bad) decisions he makes.

If you trade stocks, this account is similar to having a discretionary individual stock account, in which your stockbroker makes trading decisions for you. The main benefit of the managed account is that you get a trained professional managing your investments. The drawback is that you can’t blame anyone but yourself if you incur any losses.

A CTA is allowed by law to manage more than one account and have more than one client. However, a CTA must keep all managed accounts separate. Thus, there’s no commingling of funds allowed and no transferring profits or losses between accounts. When you choose a managed account, make sure you get a CTA who will manage your account based on your personal risk profile.