We are often asked by prospective investors what the proper minimum investment is to get started. With so much information available, investors will log into databases and see varying minimums for each CTA, and a range of different margin-to-equity ratios – this creates confusion on how much they really need to begin investing in managed futures programs. Obviously, how much a person should invest vs. how much they need in order get started are two completely different questions. What someone should invest is based on the size of one’s overall portfolio, but in this newsletter, we will be discussing what an investor needs to test the waters with managed futures.
Different managed futures firms will likely have different answers to the minimum investment question. The wide range of answers are the result of the firm’s investment philosophy, recommended CTAs, and target clientele. At aiSource, we strongly believe that regardless of the investment philosophy, and recommended programs, no investor should invest in managed futures/CTAs unless they have at least $100,000 to invest. The reason for this is very simple: diversification.
In order to increase the probability of having long-term managed futures success, an investor needs to be diversified amongst a few different CTAs. In order to do so, the investment team at aiSource strongly believes that a $100,000 initial investment is required. Since each investor’s portfolio is different (primarily because every investor has different investment goals), no two portfolios are ever alike. Regardless, a $100,000 provides an investor enough flexibility to diversify themselves amongst different CTAs. So what does a $100,000 get you?
A typical $100,000 portfolio can utilize as many as four different CTAs. The number of CTAs included has largely to do with the investor’s investment goals. The way we are able to include three to four CTAs in a portfolio is by controlling the portfolio’s margin usage. Margin usage is the total amount of dollars used by all the CTAs in the portfolio on a day-to-day basis to conduct investment activity. In most cases, we build portfolios where the average margin usage for the entire portfolio will be between 20% to 30%.
So what does an investor do if they are just shy of $100,000 in available funds? He/she can still get involved, however, they will be taking on more risk (on a percentage basis) in order to do so. For example, if we were building a portfolio of three CTAs for a $100,000 investment that had an average margin usage of 30% (or $30,000), it is likely that an investor with only $75,000 can invest in the same portfolio. However, they would be taking additional risk to do so: assume that the portfolio has a loss of $10,000, if an investor had invested a $100,000, that loss would amount to 10%, but if an investor only invests $75,000, then the loss equals 13.33%. Again, the dollar loss is still the same, $10,000, but when evaluated on a percentage basis, the risk increases with the smaller investment amount of $75,000.
Through years of investment experience, aiSource has determined that a $100,000 is sufficient capital to gain exposure to managed futures, while also achieving diversification within the asset class. Regardless, every investors situation is unique, therefore, we suggest that you speak with us and let us assist you in determining if managed futures investments are right for you.