aiSource is often approached by many different types of investors on the benefits or drawbacks in investing with emerging CTAs. Some aggressive investors are looking for the next best CTA/strategy and willing to take on more risk, whereas a more conservative investor looks for a more established or proven CTA/strategy. aiSource comes across emerging CTA managers all the time, probably speaking to one new one every week. Emerging CTAs are CTAs that either have a track record shorter than 36 months or less than $10m in assets under management; or some combination of the two. There are many benefits and risks of investing with emerging CTAs, and that is why there are some investors that favor investing with emerging CTAs while others stay completely away from them.
Short Track Record: emerging managers generally have track records shorter than 36-months. The shorter track record makes it more difficult for investors to assess performance, and therefore the risks associated with investing in the strategy.
Low Assets Under Management: an emerging manager is usually classified as having assets less than $10M. Low assets may be a concern because it shows the CTA’s lack of experience managing larger amounts of capital. It’s important that a CTA show experience managing large amounts of capital to demonstrate that there is no dilution of performance, and that there are no volume issues in the market they trade.
Lack of Experience: in some cases emerging managers may be considered “emerging” because they have very little trading experience. Lack of experience is usually what worries investors most when investing with an emerging CTA.
Low Assets Under Management: while low assets may be considered a “risk,” they can also be one of the benefits of investing with an emerging manager. Because many CTAs show a dilution in returns as they gain assets and get larger, investing in a CTA while they are small (measured by assets) can be a benefit because performance should mirror the historical track record. Disclaimer: Past performance is not indicative of future results.
Favorable Fee Structure: CTAs in the “emerging” stage are generally more open to offering an alternate fee structure (versus the traditional 2/20) as they are out to “prove themselves,” and hungry to gain assets.
Minimum Investment: with an emerging CTA, minimum investments are generally at their lowest amounts. As CTAs get larger, they may increase their minimum investment as they are no longer interested in dealing with many small investors.
Depending on the CTA, it may be worthwhile taking a chance on an emerging CTA. You have to analyze the risk to reward with each manager and determine whether their track record and experience warrant investment. Prior to investing with any emerging CTA, it is important to consult with a managed futures advisor to get their input. The published returns for emerging managers tells only half of the story about their investment strategy and there are many other factors to consider prior to making an investment.