Commodity Trading Advisors are individuals or firms that manage futures accounts on behalf of their clients, generally using some form of programmatic trading strategy.
Q. I’m pretty sure you’re not referring to the Chicago Transit Authority, so what’s a CTA?
A. It stands for Commodity Trading Advisor, someone who executes programmatic trading of futures on behalf of clients. In the case of an individual, the investor creates an account with the CTA and gives him a power of attorney to trade futures according to the CTA’s strategies. The CTA is “managing” the futures, so its called a managed futures account.
Q. And presumably the point for many investors is that commodity futures, in particular, have low correlation to the financial markets.
A. Right, that’s a big draw. Futures allow you to gain access to a very broad array of real assets, like corn, copper, oil, gas, you name it, which are pretty uncorrelated. But CTAs can also trade in currencies and other financial instruments as well.
Q. So these CTAs trying to predict the future prices of the commodities? What’s their basic approach to making money?
A. Of course, there are lots of strategies. But most CTAs are using programs they’ve developed that are called “trend following.” Just as it sounds, these programs take advantage of the idea that prices tend to move one way until they don’t. Historically, that kind of strategy has done well, but you can imagine its got limitations in very volatile market environments. Other CTAs are more fundamentally oriented, and do look at worldwide trends—say, the state of the Chinese economy — to try to predict, say, the future price of oil.
Q. We always like to understand fees structures. How do CTAs get paid?
A. Usually, rather like a hedge fund manager: 1 or 2% of AUM as a management fee, and maybe 20% or so of the profits. These are detailed in something called a Disclosure Document that anybody looking at opening a managed futures account must read carefully.
Q. OK, so is opening an account with a CTA the only way for individuals to get into these kinds of futures trading strategies?
A. Not at all, there are several others we can discuss. But the most interesting recent development is that there are several new mutual funds that offer exposure to futures, often through a diversified group of managers (for the different asset classes). So that’s another very practical alternative for using futures to diversify.