Managed Futures For Portfolio Diversification

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Is Not Knowing the Cost Stopping You from Investing?

July 27, 2017

What’s Stopping You?

Confusing grid of cost of managed futures costDoes talking about investments make you uncomfortable? Maybe it’s the unfamiliarity, the potential risk, or even the cost to get started that turns you away.

Perhaps managed futures is an alternative investment YOU have never heard of! If you have heard the term, you may assume that the managed futures cost is too expensive for the average person. Let’s explore and learn a little bit more!

What is the cost to get started?

Investing in Managed Futures should be done with risk capital. Some firms and CTAs do have upfront costs, but Foremost is proud to say that we will never charge any upfront fee! A Commodity Trading Advisor (CTA) determines the minimum amount required to trade their program. They make this judgment based upon a combination of factors like margin requirements, trading strategy, and anticipated volatility.

CTA program minimums can greatly vary depending upon the CTA, their strategy, and the markets they utilize in their program. This is not a cost or expense, but rather a minimum investment requirement. We have seen CTAs set a minimum as low as $10,000 to get started, and expand as high as $10MM and beyond!

What is the cost to keep your money in only stocks and bonds?

The cost of not investing in Managed Futures is that you are missing out on an opportunity to reduce your portfolio risk (opportunity cost). You don’t want to invest in only one asset class, that is why diversification is so important! Diversification should occur both within an asset class (stocks, bonds, mutual funds), and across your entire investment portfolio. For example, a varied basket of stocks helps that one asset class, but overall portfolio diversification helps by spreading your investment choices across multiple asset classes. This helps to reduce portfolio risk. While we believe strongly in diversification it is not a guarantee against lost.

One of those asset classes to consider is alternative investments, which include Managed Futures. While the investment amount will vary for every investor, we suggest allocating 10-15% of your investment portfolio to Managed Futures to start.

Think of it this way… Your investment portfolio is a pie. When you slice the pie, you save 10-15% of that pie to give to the alternative investment industry, which includes managed futures. That’s a rather small piece of the pie, but diversification can make a big difference! In reality, it may be costing you more by not diversifying your portfolio!

Cost of Managed Futures

What is the cost after opening an account?

There are three general types of fees to understand when trading managed futures. These fees are called management, incentive, and transactional. It is important to understand that the performance you see on a tear sheet is reflected net of these fees.

Management fees typically range from 0-2.25% value of the account per year and are typically charged monthly or quarterly.

Incentive fees are charged on the “new net profits” after all trading costs have been subtracted. New net profit means if one month is a losing month, the trader has to overcome that loss before having a “new” profit to charge his incentive fee. The new profit level is also referred to as a “high water mark”.

This is what gives the trader the incentive to make you money! Typically this ranges from 15-30% of the new net profits. Although this number may seem high, you want the trader to have a large incentive so they are motivated to make YOU money! Both incentive and management fees taken together are often negotiable to some degree. For example, a CTA that charges 2/20 (2% mgt, 20% incentive), may be willing to charge a 0/30 structure instead.

Transactional fees are the trade by trade fees. This is the cost of entering and exiting a trade. Commission rates are generally fixed by the CTA and/or broker. Exchange rates vary by market. CTAs typically have a Disclosure Document that covers other fees that may be assessed. Foremost strongly recommends that any investor read the CTAs Disclosure Document before making any investment decision.

There is no direct answer as to how much it costs to invest in managed futures, each CTA is different. It is important to understand the various types of fees to expect on your statement. This segment of the alternative investment industry can be confusing, especially to new investors.

Managed Futures are not suitable for everyone, but our Investment Specialists are here to help you decide if they are right for you! To learn more on your own, our database is a strong tool to help you perform research.

As with researching any investment, your time and energy are valuable. At Foremost, our goal is to provide you with quality service, education, and the information you need to make your experience easier!

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Categories: Portfolio Diversification
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