Over the last two to three years, aiSource has noticed a decreasing rate of one-man operations entering the CTA space. Prior to this period, it was very prevalent to come across an emerging manager that was a single man start-up. These single person CTAs are in many cases bootstrapped operations that have decided to venture into the world of asset management. The person in charge usually has a background in trading, engineering, programming, or data analysis, and has taken their skills and applied them to futures trading. They have also taken the next step in their trading, which is to setup their trading strategy to scale up to manage money for other clients. These emerging CTAs offer an immense talent pool for firms like aiSource to source new investment opportunities for clients. Over the last two to three years, however, this talent pool is shrinking and becoming an “endangered species.” Here are some reasons why:
The costs to starting a CTA have increased over the years. In addition to annual NFA registration fees, CTAs must also pay for the preparation of their disclosure documents and advisory agreements, monthly accounting, and infrastructure. Infrastructure has seen the biggest spike in costs, with many global exchanges now charging participants to receive real-time data. The CME Group, which owns the CME, CBOT, NYMEX and COMEX, charges $110/month per exchange to CTAs to receive real-time data. The combined cost of those four exchanges alone is $440/month. This cost did not exist prior to January 2016 and is likely the biggest cost (outside of rent) that an emerging CTA has.
Regulatory requirements from the NFA (National Futures Association) and CFTC (Commodity Futures Trading Commission) have always been a barrier to entry for any trader looking to covert into a CTA. Being a self-employed trader requires no regulatory oversight, but when a trader ventures out and becomes an asset manager, he/she must adhere to rules and regulations set forth by the NFA and CFTC. With cyber security and the protection of client data becoming more important, the scope of NFAs oversight is growing. This adds costs for CTAs to implement new systems and increases their time and workload. While costs may be easy to overcome for some, the time and workload can have a negative impact on trading and performance.
Higher Probability of Failure
Most investors know that the last five-year period has been a tough trading environment for CTA strategies. The demise of trend following strategies after the 2008 financial crisis led to the birth of many new strategies in the CTA space. These new strategies adapted to the new market environment that was created with increased monetary policy, but their ability for sustained success remained a challenge. Due to this more challenging trading environment, a thorough analysis of a trading strategy is of utmost importance. Therefore, a trader may take longer to assess the metrics of their strategy before launching themselves as a CTA. The days of a “fly by night” CTA with minimal trading experience and a 6-month track record are long, long gone.
Given the increased hurdles outlined above, making the decision to launch a commodity trading advisor business as a single entrepreneur is an arduous task. That is likely the reason why we have seen more two-person CTAs, or small group CTAs launching. Having one or more people to diversify the responsibilities and the risk makes it a more reasonable endeavor. Nonetheless, any one-man shops that have launched recently (or will launch in the future) should not be taken lightly. It only means that the person has done their homework, analyzed the challenges, and still made the decision to move forward into the asset management space. If anything, it shows they have confidence in their trading strategy to make the leap to becoming a commodity trading advisor.