Managed Futures For Portfolio Diversification

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Frequently Asked Questions

Frequently Asked Questions

You’ve got questions, we have answers!

Here are answers to frequently asked questions about Managed Futures and Commodity Trading Advisors (CTAs). We always encourage you to call one of our Investment Specialists for a more in-depth explanation on any one of these topics. If you don’t see your question here, chat us for instant help. Start Chat

Frequently Asked Questions for Individuals

  “What is Managed Futures?”

Managed Futures is a subset of the alternative investment industry. It is comprised of money managers also referred to as CTAs who invest in derivative markets like futures, commodities, options, forex, etc. 

  “What is a CTA?”

CTA stands for Commodity Trading Advisor. It is the CTAs job to manage an investor’s account by trading according to their strategy. It is important to note that CTAs do not hold your money or pool your money. Instead, your managed account is an individual account held at the clearing firm of your choice. 

   “Is this the same as Commodity ETFs?”

No. Commodity Exchange Traded Funds (ETFs) are funds in which an investor may own a slice. Also, an ETF is a security that tracks an index, a commodity, bonds, or several assets like an index fund. We do not offer ETF’s. We believe managed accounts have a number of benefits over an ETF. A portfolio of programs has the opportunity to accomplish the purpose of an ETF in a completely different way.

  “Are Futures Funds the same thing as Managed Futures?”

In the broadest sense of the term, Managed Futures does incorporate some investment structures like Managed Futures mutual funds and commodity pools. It is a big industry after all. However, Foremost Capital prefers to emphasize separate managed accounts because we believe the structure is more beneficial for all parties involved. For example, separate managed accounts, generally, have lower fees because you’re not paying for the legal and administrative cost of a security product in a fund or pool.

   “I heard futures, options, and commodities are super risky. Is that true?”

There is risk in all trading and investing. Let no one convince you otherwise. Regarding these derivative markets (futures, options on futures, forex, etc.), they are financial instruments that have inherent leverage and therefore risk. But they may be used in aggressive or conservative ways. While drawdown is not the only measure of risk it is one of many helpful metrics for evaluating a manager’s past performance management of risk. Risk is a multifaceted concept. We strongly encourage you to talk with one of our Investment Specialists to better understand risk as it relates to Managed Futures. The risk of loss in trading futures contracts or commodity options can be substantial. Products that are traded on margin carry a risk that you can lose more than your initial deposit.

   “Where is my money actually held?”

Investors whose account is managed by a CTA have their money held at a futures clearing firm. Foremost Capital has the benefit of relationships with some of the major clearing firms in the industry. Not all brokers can offer access to many clearing firms. This feature is especially helpful as it adds another way to diversify assets.

   “How much money do I need to participate?”

A Commodity Trading Advisor pre-determines the minimum account size they will manage based on different factors like margin requirements, their trading strategy, and anticipated volatility. The minimum requirements are just as diverse as the strategies used by CTAs. We’ve seen minimums as low as $10,000 and as high as $10MM and beyond. Ask an Investment Specialist or consult our database for information about a specific CTA.

   “What are the fees involved?”

Most CTAs operate under a similar fee structure commonly known as “2 and 20.” While some deviate from this standard model, there are two fees to know about.

  • Management Fee – This is 2% of the net asset value of your account annually. However, the fee is usually assessed monthly (0.17%) or quarterly (0.5%).
  • Incentive (Performance)Fee – This fee is 20% of new, net profits. New profits are achieved above and beyond any previous equity high (i.e. high watermark). Net profits are after all trade commissions and fees.

   “I’m already diversified in multiple stocks and mutual funds. Why do I need Managed Futures?”

Correlation is an important concept to understand when diversifying your account. Owning different securities is often recommended, however, there are many factors that may cause all stocks to rise and fall at the same time (i.e. high correlation). Managed Futures as an asset class has very low correlation to stocks or bonds giving you another basket to put an egg. The factors that cause stocks and bonds to rise or fall may or may not have any effect on the CTA(s) managing your account.  While there are never guarantees, we suggest: give your portfolio the opportunity and potential to profit whether the stocks are in a booming bull market or ruthless recession. Managed Futures has the ability to potentially smooth an equity curve; however, adding Managed Futures to a portfolio is no guarantee that a portfolio will not suffer loss or that it may be more efficient. 

   “Can I use my IRA to invest with Managed Futures?”

Yes. Many investors have diversified their IRA money with Managed Futures. As with non-retirement money, we encourage you to remember that all trading should be done with risk capital, money you can afford to lose. Talk to one of our Investment Specialists for a recommendation on a Self-Directed IRA custodian.

   “What is Notional Funding?”

Since CTAs generally do not use the full minimum investment amount for trade margin, some will allow investors to deposit a smaller cash balance that will be traded with the same dollar for dollar risk as a fully funded account. The difference between the cash balance and the fully funded nominal trading value is called notional funding. It is important to remember that funding your account with a smaller amount will work for or against you by increasing the volatility of your returns. It is not meant to stretch an investor beyond what they could support if fully funded.

   “What are tax ramifications of a Managed Futures account?”

Futures investments are treated differently than securities under the tax code. Read our blog post for a more thorough treatment of the potential tax advantages of futures accounts. Here are a few main differences

  • Potential Tax Advantage with Futures
  • No trade by trade record keeping necessary
  • One 1099 is given per account at the end of the year
  • Tax is based on net profit or loss for the calendar year
  • Blended, static tax rate of long-term / short-term capital gains
  • IRA eligible. Always consult with your tax professional regarding questions involving tax treatment

   “What is a QEP?”

QEP or Qualified Eligible Person is a term used for certain investors and entities. See the Code of Federal Regulations HERE. Also, here is a video we made to explain the term.

 

Frequently Asked Questions By RIAs

   “Where can I see the performance history of your managers?”

We provide detailed performance information in our CTA database. Access is free. Click on the link below to sign up for a password. All the track records are net of commissions and fees. Foremost Capital Managed Futures Database.

   “How do I make money on this?”

It depends on your structure and broker-dealer. For some RIAs, managed futures can be treated as a “held away” asset. Call one of our specialists to discuss your unique situation and establish a mutually beneficial relationship.

   “What are the tax ramifications of a Managed Futures account?”

Futures investments are treated differently than securities under the tax code. Read our blog post for a more thorough treatment of the potential tax advantages of futures accounts. Here are a few main differences:

  • Potential Tax Advantage with Futures
  • No trade by trade record keeping necessary
  • One 1099 is given per account at the end of the year
  • Tax is based on net profit or loss for the calendar year
  • Blended, static tax rate of long-term / short-term capital gains
  • IRA eligible.Always consult with your tax professional regarding questions involving tax treatment

   “Are Managed Futures available for qualified money?”

Yes. While popular broker-dealers (e.g. Schwab, Fidelity, etc.) may not allow Managed Futures investments in the IRAs for which they are custodians, our clients use a Self-Directed IRA Custodian allowing money held in traditional, ROTH, SEP and SIMPLE IRAs. You may even use solo-401(k) money. Call one of our Investment Specialists to learn more about the Self-Directed IRA Custodians with whom we work.

   “What’s the difference between your services and Managed Futures mutual fund on my platform?”

Managed Futures mutual funds are a trendy new product that offers shares of a fund that is managed by one or more CTAs. In theory, you should be able to get the same risk/reward opportunity, but reality may be different.
Foremost Capital believes that using separate individually managed accounts to access CTAs are superior to fund vehicles in a number of ways:

  • Better liquidity
  • Better transparency
  • Lower cost
  • Greater manager selection
  • Greater flexibility in margining
  • Greater security and accountability
  • Call one of our Investment Specialists to better understand the difference between Managed Futures fund vehicles and separate managed accounts.

   “How accessible is the money in a Managed Account?”

Futures are very liquid. In fact, typically, you may be able to access your funds more quickly than you’re used to with securities investments. Unless noted otherwise, CTAs do not have a lock-up period. And at your direction, they can liquidate your positions at any time giving  you quick access to cash. Clients can withdraw their funds at any time directly from the FCM without prior approval from the CTA.

   “What due diligence can you provide on your managers?”

In addition to a net performance track record, most CTAs provide a lengthy disclosure document that contains information about the principals, trading strategy, risks, fees, etc. This is somewhat similar to a prospectus. We also maintain contact with CTAs as needed. Some CTAs, however, operate under an exemption from the CFTC if they only offer their management services to sophisticated investors that meet the definition of a Qualified Eligible Person (QEP). Such CTAs are not required to have a disclosure document. So, while they may have a summary document, they may choose to not provide details. 

   “How can I see the combined performance of multiple managers?” 

This is something we do every day for many clients and those interested in seeing how the hypothetical past performance of different managers look when calculated together. The tool we use is fairly complicated and offers many options, aspects, and statistics. For those interested, we can easily provide reports that have multiple managers combined into one report for your performance analysis. For those with the financial capability, we strongly recommend constructing a blend of multiple CTAs with low correlation to each other. When done right, such blends can potentially help reduce the volatility of your managed futures investment while increasing the returns.

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