With over 1,000 registered CTA’s within the managed futures industry, investors have a large selection of managers to choose from. However, all 1,000 maybe not be open to all types of investors. Many CTA’s (Commodity Trading Advisors) within the industry may operate under certain exemptions which limit their ability to offer their strategy to all investors. There are many different types of exemptions, however the most common exemption used by CTA’s is CFTC exemption 4.7. This exemption allows CTA’s the relief of filing a disclosure document with the NFA (National Futures Association), however it also limits their ability, in that they are only allowed to offer their strategy to QEP’s. In dealing with many new investors entering the managed futures space, the term QEP, or rather qualified eligible persons is unfamiliar. What is a QEP and how do investors qualify?
Most investors are familiar with a term called, accredited investor. There are many different qualifications to be considered a accredited investor, however the two most common are a natural person who:
- earned income that exceeded $200,000 (or $300,000 together with a spouse) in each of the prior two years, and reasonably expects the same for the current year, OR
- has a net worth over $1 million, either alone or together with a spouse (excluding the value of the person’s primary residence).
The term accredited investor is most commonly used on the securities side, which is regulated by the SEC (Securities and Exchange Commission). Certain securities offerings that are exempt from registration may only be offered to people who are accredited investors. The SEC’s main purpose in classifying investors as an accredited investor is to identify persons who can bear the economic risk of investing in these unregistered securities.
The CFTC allows CTA’s the ability to file for exemption 4.7, however it limits their offering to QEP’s only. The CFTC qualifies an investor as a QEP or qualified eligible person if, one of the following are true:
- a natural person whose individual net worth, or joint net worth with that person’s spouse, at the time of either his purchase in the exempt pool or his opening of an exempt account exceeds $1,000,000
- a natural person who had an individual income in excess of $200,000 in each of the two most recent years or joint income with that person’s spouse in excess of $300,000 in each of those years and has a reasonable expectation of reaching the same income level in the current year
If an investor falls into one of the above requirements, it will also need to meet the portfolio requirement in order to be considered a QEP. The portfolio requirement can be met in one of three ways:
- Owns securities and other investments with an aggregate market value of at least $2 million;
- Has had on deposit with an FCM at least $200,000 in exchange-specified initial margin and option premiums for commodity interest transactions, together with required minimum security deposit for retail forex transactions, in the six months prior to the investment; or
- Has a combination of the two above. For example, has $1 million in securities/investments and $100,000 in exchange-specified initial margin in the six months prior to the investment
Similar to how the SEC offers unregistered securities to accredited investors, the CFTC offers unregistered CTA’s to QEP investors only. Just because a CTA operates under exemption 4.7 does not mean the CTA is more risky or has a high minimum investment, however it simply means the manager is relieved from filing a disclosure document with the NFA and they can only offer their strategy to a select group of investors.
The above article only covers how individuals are classified as QEP’s, for a full description on the qualifications for QEP status please refer to a document published by the NFA, click here.