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Valentine's Day Special: Qualities we LOVE in a CTA

Categories:
  • Managed Futures Advanced
  • Managed Futures 101

In honor of Valentine's Day, we thought it would be appropriate for us to share one thing we love.  Without getting too sappy, we wanted to reveal some of the qualities that we truly love in a commodity trading advisor. While this list is not the end-all-be-all when it comes to receiving a client allocation from our firm, if a CTA checks all the boxes below, it's very likely that they will receive a very thorough look from the aiSource team.

Low Margin-to-Equity Ratio

The word "low" is relative, and might mean something different to a firm other than aiSource.  A low average margin-to-equity ratio for aiSource is anything under 10%. The reason we "love" low margin usage CTAs is because it shows us that those CTAs are efficient users of the investment being given to them. Another reason is that it gives us flexibility with clients that would like to notionally fund CTAs - CTAs that use low margin allow a client to notionally fund more easily than high margin usage CTAs. Furthermore, a CTA with low margin usage tends to have less exposure than a CTA with higher margin usage; in certain instances this may also mean they have less exposure to risk.

Return on Margin Ratio Greater Than One

Prior to understanding why we "love" a return on margin ratio greater than one, it's important to understand what "return on margin" means: return on margin.  If a CTA uses 10% in margin, but averages an annual return of 5%, then their return on margin ratio is 0.5.  Consequently, if a CTA uses 10% in margin, but has an average annual return of 20%, then their return on margin ratio is equal to 2.0. Basically, that's saying that they produce twice the amount of return than the margin dollars they utilize.  The reason a return on margin ratio greater than 1.0 is one of our "loved" qualities, is because it shows which CTAs can produce a return greater than the margin dollars they tie up on a day-to-day basis.

Unique Investment Strategy

A unique investment strategy is probably a quality that all managed futures investors "love." The reason is simple: the CTA does something unique not currently offered by any of the close to 2,000 registered CTAs. Obviously, doing something unique and not having good performance does not mean much, so having a combination of a unique investment strategy, and good performance is the ideal formula.

A Good Investment Team, and Supporting Cast

It's important to know that a client's investment is in good hands when making an allocation to a CTA. Therefore, we like to know the CIO or investment team at the CTA has experience, education, and expertise to manage money on behalf of clients. Further, as minuscule as it may sound, it's very important to work with a team of individuals that are friendly, easy to work with, and proactive with day to day administrative work.  Nothing puts a bigger smile on our face than when we send an email to a CTA and hear back in less than an hour.

In conclusion, [and completely unrelated to the above] we would like to tell all of our clients, CTAs, advisors, custodians, and back office personnel how much we love working with all of you.  You make it enjoyable coming to "work" everyday, and we couldn't offer our services to our clients if it was not for all the support we receive from all of our partners. Have a good Valentine's Day, all!

Disclaimer: Past performance is not indicative of future results. Futures trading involves substantial risk of loss and may not be suitable for everyone. By no means is this newsletter/blog post offering any investment advice or suggesting to make any trade recommendations. Please consult an aiSource advisor prior to opening any managed futures accounts.


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Past performance is not necessarily indicative of future results. Trading commodity futures, options, and foreign exchange ("forex") involves substantial risk of loss and is not suitable for all investors. In no way is the advisor of the month a direct recommendation of aiSource or any of its affiliates. Please carefully review the disclosure documents and any other promotional material prior to investing with any program. Managed accounts and/or managed futures are very risky and may not be suitable for all investors. Please consult with a Managed Futures specialists prior to investing.