Don’t Put Your Eggs in One Basket: CTA Edition

“Don’t put your eggs in one basket” is a common phrase opined to investors.  Quickly followed by the mantra of “diversify, diversify, diversify.”  The same principle can also apply to commodity trading advisors as it pertains to their assets under management (not the markets they trade).  Having a diversified group of assets, such as, high-net-worth, family offices, and institutions, provides more stability to the business in the long-run.  Here are some other key take aways for CTAs:


Don’t rely on a few clients to make the bulk of your assets


Regardless of size (as measured by assets under management), a CTA should always try to onboard as many clients as possible.  Being content with a handful of clients is risky, because you never know when one or two may close, which will result in a big AUM decline.


Continue to onboard a mix of client types even as your assets grow


Having a diversified mix of client types can be very valuable during times of drawdowns.  Drawdowns test the “stickiness” of your assets, and in these times it’s necessary to have a variety of different clients because you never know which ones will get nervous and redeem.  Therefore, it’s good to have a group of individual, family office and institutional type clients. 


Keep offering the minimum investment as long as operationally possible


As a CTA you should offer your minimum nominal investment for as long as it is feasible for your operations.  Sometimes CTAs raise their minimum because they want to attract larger accounts, but in the process, they are unknowingly shutting out assets. There may be investors out there willing to invest at lower levels that may not reach out because they see a higher listed minimum.  If this happens five or ten times, that is a lot of AUM a CTA may unknowingly miss.


Stay loyal to day one investors


Regardless of how large a CTA gets, they should try their best to remain loyal to their day one, and many times smaller, investors. The day one investors took the biggest risk when they invested in the early stages of a CTAs life cycle, so a CTA should reciprocate that loyalty by keeping them in favor of larger clients or more favorable fees.