We recommend to start using our algorithms for live trading at the beginning of a month. That way, you can get a full month of performance without potentially having to initially go through a mid month decrease in volatility and performance that occurs from time to time. Also, our algorithms tend to work best in the the beginning of a month when markets tend to be the most volatile.
An account statement will be emailed to you at the end of every trading day. Investors have access to a number of statements, including day-end and month-end statements showing all trade activity that took place in their account.
A managed futures account is like any other account established to trade futures, except that the trading decisions are made by a professional money manager, called a Commodity Trading Advisor (CTA).
Managed futures can provide valuable diversification to a portfolio of stocks and bonds, and offers the potential to reduce volatility and enhance returns. Managed futures have been shown to provide returns with little or no relation to the stock market. Harvard Business School Professor John E. Lintner found that including managed futures in a portfolio of stocks, and in a portfolio of stocks and bonds “reduces volatility while enhancing return,” and that such portfolios “have substantially less risk at every possible level of return than portfolios of stocks, or stocks and bonds alone.” Managed futures are also attractive as a stand alone investment. Past performance is not indicative of future results.
All gains earned from managed futures accounts are taxed as if they were made up of 60% long-term capital gains and 40% short-term capital gains. Therefore, 60% of the gains are considered long-term capital gains are subject to a maximum federal income tax of only 15%, compared to the short-term capital gains that are subject to a top tax rate of 35%. Unlike many other investments, such as stocks, which need to be held for at least 12 months before they gain the coveted long-term capital gain rights, managed futures investments do not have to be held for a specified period of time in order for the 60/40 rule to apply.
Yes! When you invest in a managed futures program with a Commodity Trading Advisor (CTA), your funds are secure since the CTA does not have physical access to your funds, but simply the authorization to trade your funds on your behalf.
Please keep in mind that there is the potential in some cases, albeit rare, for the FCM (Futures Clearing Merchant) to fail due to bankruptcy or not segregating customer funds. In both of these instances, a client could potentially lose their funds due to FCM failure. Please see our disclosure document for more details.
CTAs are typically registered with a national regulatory body. CTAs trading futures in the U.S. are regulated by the Commodity Futures Trading Commission (CFTC) and the National Futures Association (NFA). The CFTC is a Federal regulatory agency that is responsible for administering the Commodity Exchange Act. The CFTC monitors the futures markets, and options on futures markets in the United States. The NFA was designated by the CFTC as a “registered futures association.” The NFA is the self-regulatory organization for the futures industry.
Generally speaking, most CTAs charge a 2% annual management fee and a 20% annual, performance-based incentive fee. These fees can, however, vary among managers. For example, some CTAs may not charge a management fee at all but will increase their incentive fee to gain greater participation in upside performance. All fees charged by a CTA are described in the CTA’s Disclosure Document and should be scrutinized carefully before opening an account.
Management and incentive fees are typically deducted on a monthly basis from the client’s account based on the CTA’s gross performance. The incentive fee is applied to the month-over-month-end profits that are in excess of the previous “high-water mark.” The incentive fee is calculated net of all fees and commissions. Realized and unrealized (open equity) profits and losses are normally included in this calculation.
A high-water mark is the performance level that the CTA must exceed in order to charge incentive fees and typically is calculated net of brokerage commissions, exchange fees, and the CTA’s management fee and incentive fee payments.
For example, an account with a beginning value of $1,000 earns trading profits of $100 and pays a 20% incentive fee during the first billing cycle. The actual ending account value for that billing period is $1,080 ($1,000 + $100 – $20) and the CTA would report these gains as +8% (80/1,000). Then, $1,080 would be used as the high-water mark for the following billing period.
If the CTA made another $100 during the second billing period, the fees would again be $20 ($100 x 20%), leaving an account value of $1,160 ($1,080 + $100 – $20); $1,160 is now the new high-water mark. The performance would be reported as +7.4% ($80/$1080.)
Suppose that the CTA lost money during the third billing period. The high-water mark remains $1,160 and an incentive fee would not be charged again until the account value exceeded that amount.
Management fees are charged regardless of performance or high-water mark, and are based on account value. It is essential that an investor understands the fees inherent in managed accounts and the methodology used for their calculation. Fees are addressed in the CTA’s Disclosure Document and advisory agreements also.
A commodity trading advisor (CTA) must provide a prospective client with the CFTC-required disclosure document at or before the time a trading agreement to direct a client’s account is solicited or entered into, whichever is earlier, and must obtain a signed and dated acknowledgment from the prospective client noting that the client has received the disclosure document. Disclosure documents must follow a CFTC/NFA-specified format, covering – among other topics – the identity of principals, principal risk factors, a description of the trading program, a complete description of each fee charged by the commodity trading advisor and a disclosure of material litigation.
Notional funding enables qualified investors to invest in a CTA program at a lower minimum by using increased leverage. Keep in mind, that increasing leverage also increases risk. For example, for an account with a minimum of $100,000, an investor may want to fund the account with $50,000 of actual funds and $50,000 of notional funds. In that instance, the notional value of the account is $50,000 and the nominal value is $100,000 (nominal – notional = actual). This means that the account has $50,000 of actual client assets but will be leveraged to trade like a fully funded $100,000 account. The same volume and number of trades placed in a fully funded account ($100,000) will be employed in the notionally funded account ($50,000), thus increasing the margin/equity ratio.
Managed futures are not appropriate for everyone. Only risk capital should be used to invest in managed futures. Risk capital is defined as capital that you do not want to lose, but if you did, your lifestyle would not be altered. We recommend that the amount of money you invest depends on your risk tolerance, your temperament and your financial goals.
Usually, an investor views a managed futures account as a longer term investment, because futures investing is speculative, and most markets tend to be cyclical. Therefore, even the most successful professional traders can experience periods of flat returns, or even drawdowns. Consequently, losses can be incurred for those trading periods, and if an investor remains with the trading program for a longer term, the investor can allow the account the opportunity to recover from such cyclical losses. Ultimately, the investor will have to determine the length of time that he will keep his investment with a particular CTA.
Yes. Oftentimes, investors who are already trading, also invest with a CTA, because the CTA can offer additional diversification to the investor’s portfolio.
Individual investors seeking the profit opportunities of the futures market without the responsibility and demands of day-to-day account management. Also, individual investors who trade their own account, and are seeking further diversification through a different trading program.
Yes, but they must be invested through a “self-directed” IRA. You must first open a self-directed IRA that accepts futures accounts through a third-party trust custodian and then open a futures account under the custodian’s name. IRA funds that are placed directly into a futures, options, or foreign exchange account could cause unintended tax consequences for investors. A self-directed IRA allows the investor to roll his or her assets forward and continue to let them grow, tax-deferred.