Here is a list that I’ve developed for Individual investors to know the answers to or ask before investing their risk capital with a Commodity Trading Advisor or Professional Money Manager. This checklist is ever evolving as new information comes to light or the dynamics change in the market place.
Our hope in providing this list of questions is to assist new and even veteran investors to Managed futures a “system” or “methodology” that can provide them with crucial information, and steer them away from cardinal mistakes before placing their hard earned funds with a trading advisor. This is not our full list but thought it would be a good start, some food for thought, and give you some necessary tools before deciding to invest in Managed Futures.
- What are your personal objectives as an investor in Managed Futures?
- Do you have a specific process or method for selecting a CTA? Ex: Length of Track record? How has the CTA performed in differing market environments? What do they do to minimize losses and maximize gains? Is their strategy adaptable and do they have the ability to innovate?
- What is your specific concept in choosing a CTA that gives you an advantage?
- How much risk capital should you invest with any one CTA or money manager? How much of this risk capital could you afford to lose? As an investor where is your cut-off point?
- How much money do you need to make each year from these investments? Do you need to live off this money?
- Are your investment goals realistic, or are you expecting to “get lucky”?
- What are your expectations of the CTA? As an example, If you found a CTA that has a system that is right half of the time and on individual trades the profits are 2 times bigger than the losses, they could still go on a run of 10 straight losing trades in a row, would you be able to ride this out? How did the CTA exit a losing trade? Did they use stops and what is the maximum loss they will accept per position?
- Are you looking for a CTA that trades longer or shorter term? Possibly having both in a diversified portfolio or even a universe of managers?
- Are you the only person involved in making the investment decisions or do you have a partner(s)? or an advisor with expertise and a working knowledge of CTA’s?
- Specifically, what do you expect to make each year as a percentage of your trading capital? What risk level are you willing to take on in order get those results?
- What is the largest peak-to-trough drawdown you can you tolerate?
- How will you be certain your plan on picking a CTA is working? Do you know what to expect from them in different types of markets (Trending, Consolidating, High volatility, etc.)?
These are a few questions we feel are important and may help you while going through the process and research of selecting a CTA(s), or even investing in general. Obviously there are many more questions you should ask yourself but the above should get you thinking in the right direction and hopefully helps you uncover information you may not have thought of beforehand.