How to Select a Commodity Trading Advisor
As a way of diversifying their investments, many investors are looking to opportunities in the commodities market. However, many don't have any interest in trading commodities themselves and wonder how to select a commodity trading adviser to take advantage of the opportunities for them. By following a few key steps, you can find a professional commodity trading adviser (CTA) to manage your money to take advantage of these potential opportunities.
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Instructions
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Picking A Winner
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1
On your computer, go to ManagedFutures.com, which is a site dedicated to ranking CTAs. Click on the "Top 40" to pull up the top 40 ranked CTA funds in the industry. CTAs are professionals with expertise in trading deratives like futures contracts whose value is derived from the underlying asset such as gold, oil, stock indices, lumber, interest rates, etc.
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Select the "since inception" tab in the drop-down menu above the Top 40 CTA rankings. CTAs trade on behalf of their investors by running Managed Futures Funds. Note the funds that are at least five years old, so that you can identify a CTA with a long track record.
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Take note of the "WDD" percentages on the page next to the selected CTAs. This stands for "Worse Draw Down," which means the worst loss of capital a fund has experienced. If a CTA has a fund value of $1,000,000 but a WDD of 30 percent, then at some point that fund was only worth $700,000. Typically, you eliminate any CTA candidate with a WDD of 50 percent or greater.
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Write down the AROR (Acutal Rate Of Return) of the remaining CTA candidates, and then select the CTA that has a AROR of at least twice its WDD. That way if you do experience a draw down, you know the CTA has a track record of making up the losses.
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Tips & Warnings
Don't be lured into investing with a CTA because of big returns. Big returns usually mean big draw downs in capital, which can really take a toll on you emotionally when your money is involved. If you like to sleep at night, look for a CTA that has low draw downs but consistent returns.
You should not invest in what you don't understand. CTAs often specialize in certain segments of the derivative markets such metals like gold, silver and copper, or energies like oil, gas and heating oil. You should be comfortable with a CTA's style of trading as well the markets it trades before investing your money with that CTA
Remember that even if a CTA has excellent performance in the past, that is no guarantee that it will have that same performance in the future. Unlike with federally insured bank deposits, you could lose the money you invest with a CTA.
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Comments
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Jay Camus
Mar 29, 2010
Attain Capital Management provides alternative investment solutions offering returns independent of the stock market through trading system portfolios and managed futures. By combining several lowly correlated trading systems and CTAs into one portfolio, there is the potential for improved performance with less overall risk.
