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Transitioning from Proprietary Trader to Commodity Trading Advisor

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  • For Trader's/CTA's

There are over 2,000 registered commodity trading advisors (CTAs) with the National Futures Association.  Less than 10% of those CTAs are able to run a successful operation for more than five years.  In many cases, the success rate and life expectancy of a CTA is a like a new restaurant - it's difficult to become a long-term success story. Transitioning from successful trader to successful CTA can be a difficult undertaking which is often underestimated.  aiSource consults many proprietary traders that are in the midst of considering managing client assets. Here are some key items to consider when contemplating the decision of becoming a commodity trading advisor.


This undertaking is a new business and should be treated as such.

We see it time and time again, emerging CTAs struggle to run an effective and efficient business, ultimately hindering their growth. You are no longer trading for yourself, but rather managing client assets which needs to be handled with extreme professionalism. Develop a coherent business plan which includes marketing strategies, operations and management plans etc. Brush up on your customer service skills.  As you develop new business relationships and acquire clients, these skills will be imperative. Clients, brokers, marketers, everyone will expect you to be accessible and responsive. 


Scalability

Prior to taking the necessary steps to becoming a commodity trading advisor, you must first determine if your trading strategy is scalable.  Scalability means being able to manage a larger number of assets based on the markets you trade and your trading style.  For example, if you've had success in your proprietary career trading milk futures, it is highly unlikely that you will be able to replicate your success across a large number of clients.  Lack of scalability can also occur if you tend to "scalp" liquid markets; since getting in and out of trades quickly is important to success in this trading strategy, it may be hard to execute large orders, and therefore, limit you from managing a large number of assets.


Have a verifiable actual performance record of at least 12 months.

It's a question often asked to us: how many months of track record do I need in order for you to begin raising assets for me? The answer is dependent on each individual strategy, however a general rule of thumb would be anywhere between 12-18 months at the very least. Be certain that the track record (whether proprietary or client) is exactly the same strategy that you will market to investors, this includes risk management, position sizing, and margin usage. Investors like to know what to expect, surprises are never fun!


Establish yourself at the right FCM for trade execution, one which can facilitate your growth as a CTA.

Establishing your CTA business at the right FCM is crucial for long term success. Although setting up execution may seem seamless and a mundane task for a trader, it is important to know that you are working with an FCM that is responsive when things go wrong. When problems arise being able to reach out to someone at the FCM (and/or your executing broker) will help elevate unnecessary stress. There are many cheap options for trade execution out there these days, but remember you get what you pay for.


Hire a professional to handle your compliance (disclosure documents and advisory agreements) and your accounting.

Now that you will be actively searching for investors in your strategy it is important to follow the guidelines the regulators have in place. Being compliant with the NFA and CFTC will ensure that everything is properly laid out to the investor and all risk disclaimers are disclosed. Also, hiring an outside accounting firm gives investors an added level of comfort knowing that a third party has calculated and verified your returns. Although it's an additional cost, hiring both a compliance and accounting firm is will lay a good foundation for your business.


In short, trading for yourself and managing client assets are two entirely different things. The above points should help outline the major steps needed in order to launch a new CTA. Our final words of advice is as follows: be flexible and open minded - investors want to feel comfortable with not only the strategy but also with you as a person. Remain tenacious, the road to building a successful CTA is typically a long one and there will be many ebbs and flows along the way.  Investors will come and go, remain persistent. 

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.