Prudent investors like to know where their money is and how it is being used. They don’t want surprise announcements that the investment vehicle holding their money has lost 75% because of poor choices or because of a lack of management integrity. In Managed Futures, there are two main ways to invest in a CTA, either the fund method or the separately managed account approach. Each has different characteristics. A typical fund has limited liability and lower minimums. But funds also lack transparency. As part of that lack of transparency, a fund may have marketing, trading and legal fees bundled into the package.
With the financial scandals of the last few years, many investors are seeking such assurances as safety and transparency. They turn to separately managed accounts (SMAs) as a structure in which to place their money, says Greg Taunt with IASG. “With a separately managed account you can gain transparency into individual positions,” says Taunt. “An investor can see all the fees taken out, which will be both transactional and management. He says there are no legal or marketing fees earmarked.”
Who are the investors who prefer separately managed accounts? Taunt says they are usually investors with a higher net worth or institutional customers who want to use their money efficiently. They are also seen by wealthier investors as exclusive and they offer options not available to lower income categories. “If they are trading a futures account of $2 million, they don’t need to keep that amount in the account,” says Taunt. “While they will have that amount represented, they can take part of the money and generate additional interest outside the investment. They have more flexibility with their cash for other investments and to meet a margin call.”
Another SMA advantage is that accounts are not held with a manager but with a third party. Taunt says there is a restriction as to who can access the capital. The holder usually would be a Futures Commission Merchant, where the trades would clear. Money for a FCM is held in a bank and not where the account is trading. “There are layers of approval in order to facilitate the movement of cash and to aid in making it safer.” Taunt says. With a fund, even though the manager may say they are trading with a specific methodology, or that they are entirely systematic, you have to wait month-to-month to see if they are doing so. There is no insight into the individual trades.
“In the era of the post-Madoff world, transparency is obviously something that investors are keen on,” says Taunt.