Demystify Managed Futures: Separate Managed Account
January 31, 2018
If you search “managed futures” in Google, you get definitions and news articles. Wikipedia actually gives a decent general description right off the bat:
A managed futures account (MFA) or managed futures fund is a type of alternative investment in the US in which trading in the futures markets is managed by another person or entity, rather than the fund’s owner. Managed futures accounts include, but are not limited to, commodity pools.
While that is generally true, managed futures do exist extensively outside the US, and the last sentence is more misleading than accurate. There is a sense in which managed futures accounts are like commodity pools, but the differences are noteworthy. Wikipedia is correct, however, that the basic way to access the “managed” part of managed futures is through a managed account or fund. (A managed account is also known as a Separate Managed Account or SMA.) Understanding the differences between an SMA and fund is good for any investor looking for a thorough education.
With that in mind, we’re doing a two-part series to help demystify the differences between a managed account and a fund. We will focus on the basic features of each structure and provide some comments of comparison. (Spoiler: we are partial to managed accounts for good reasons.)
Separate Managed Accounts may not seem intuitive at first. Many individuals experience the world of investing through a mutual fund of some sort. Alternative investments like hedge funds, real estate, and private placement investments often pool investor’s money together into a fund. The concept of a Separate Managed Account may be foreign to investors who are used to a fund.
A Separate Managed Account with a CTA is functionally very similar to a self-directed trading account. Often with the help of an Introducing Broker like Foremost Capital, you (the investor) open and own an account held at a futures clearing firm. This account is managed by a third party known as a Commodity Trading Advisor. All accounts managed by that CTA are separate from one another; your money is not pooled with the next investor using the same CTA. Through a limited Power of Attorney, the CTA exercises trading discretion over your account. You receive account statements in the same way as if you were trading your own account even though the trades were done by the CTA.
This may sound obvious, but as the account owner, you own the futures contracts held within your account. The profits are yours, but so are the risks. The CTA cannot move money in or out of your account with the exception of charging fees as described in their disclosure document.
As the account owner, you are in charge of setting the Nominal Trading Level with the CTA (as long as it meets their minimum requirements) and have the freedom to use notional funding because you are responsible for the risk. This is especially handy when an account owner has several separate managed accounts and wants to use his or her cash efficiently. For institutional investors, managed accounts allow immense flexibility for cash management between the bank and clearing firm.
As the account owner, you receive daily statements that provide great transparency into the trading activity of the CTA. These statements will not only show all positions but track margin requirements, net option value, and other items in multiple currencies if needed.
Your investment/cash is very liquid at the FCM. With the rare exception of CTAs who have a lock-up period, you can instruct the CTA to stop trading and close positions at any time. This frees your cash for a transfer. In some cases, this can happen within a day or two, but generally, it is advisable to exit positions strategically, especially if options are involved.
Fees are an important part of the equation for any savvy investor. A managed account gives you a transparent look at how much and when fees are being charged. Additionally, because of the direct relationship with the CTA, sometimes it’s possible to obtain a tailored fee arrangement that better suits your preferences. This fee customization also goes for brokerage commissions charged on each transaction.
Many investors also prefer managed accounts because they can be used alongside other trading strategies at the same clearing firm. If you trade on your own, you can potentially cross-margin your accounts managed by a CTA allowing for greater efficiency of your cash on deposit. Additionally, you will receive a daily statement from your FCM reporting performance for all your accounts.
If the details of how managed accounts work may seem intricate and complicated, we think you deserve a more sufficient explanation of exactly how your money gets invested. Contact us with any questions about what your money is doing! We enjoy the dialogue.
Stay tuned next week for our next post on Managed Futures Funds and how they work!
In the meantime, give us a call at 888-818-0880 to discuss!