Answers to your Managed Futures Questions

  • Managed Futures 101
Last month we asked you to submit questions for us to answer.  We selected three that we thought could be beneficial for our readers.  Here they are:

Do you have any tips for a new investor considering managed futures?

  •  Be clear about what you are looking to achieve, whether it is adding diversification to your entire portfolio, income generation, IRA growth etc. The manager selection process will vary based on your needs.

  • Know your tolerances. Often times new investors will place too much emphasis on performance rather than risk.  Seek programs that allow you to achieve your goals over the long term while keeping risk at a tolerable level.

  • Educate yourself. Do your best to learn as much as possible about the industry and the programs you are considering.  When speaking with your advisor, ask questions about anything you may not fully understand. The best advisors will appreciate you being proactive and will devote as much time as possible for you to feel comfortable with the investment.       


Besides performance what are the key statistics an investor should focus on? 


While there are many factors and statistics that contribute to comparing CTAs, return on margin (ROM) and Sharpe Ratio are two statistics which are helpful to compare CTAs on an apples to apples basis.


The CTAs with the highest return on margin (calculated by dividing the average annual return by the average daily margin usage) shows us which CTAs generate the highest return based on the margin they use. CTAs with a ROM below 1 are generally not favored, because it means that they yield a return less than the margin that they use.


Once we identify a CTA's return on margin, we then look for CTAs that have a Sharpe Ratio greater than 1.00.  A Sharpe Ratio of 1 tells us that the investment provides a 1:1 to return for each unit of risk taken.  Similarly, a Sharpe Ratio less than 1 signifies that a CTA's return is less than the amount of risk they are taking.  For example, a Sharpe Ratio of .50 means that you receive .50 units of return for every 1.00 unit of risk you take; if the Sharpe Ratio is 1.50, then that means you receive 1.50 units of return for every 1.00 unit of risk you take.  As an investor, you should target at least a 1:1 ratio for return to risk, and therefore, you should be targeting CTAs that have a Sharpe greater than 1.00.


How difficult is it to get started, what is the process?


Since there are many parties involved in developing a managed futures portfolio - commodity trading advisor, futures commission merchant (FCM), and broker - knowing how to start the process can be confusing.  The best place to start is with a brokerage firm, like aiSource.  Since the brokerage firm communicates with all parties, it makes things very easy for the investor to run everything through the brokerage firm. The broker will communicate with all parties on behalf of the investor, and also facilitate the completion of all account opening paperwork.  Furthermore, if an investor would like to invest through a tax deferred account (like an IRA or 401k), then the brokerage firm can also communicate with an IRA custodian on behalf of the investor.


The process is quite streamlined and easy for the investor.  Once the investor completes account opening paperwork with the FCM, the brokerage firm can help with funding your account, complete all CTA paperwork, and help make ongoing portfolio modifications. 

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.