Guide to Becoming a Commodity Trading Advisor

105 Pages·2007·0.62 MB·English

Guide to Becoming a
Commodity Trading Advisor
GuidetoBecomingaCTA
DeanE.Lundell
©Copyright2004 ChicagoMercantileExchange
GuidetoBecomingaCTA 1
TABLE OF CONTENTS
5 Acknowledgements
ChapterOne 7 MarketTrendsforAlternativeInvestments
ChapterTwo 9 TheBusinessofBeingaCTA
BusinessPlanandStructure
Staffing
GrowthManagement
OfficeEquipmentandTradingSystems
Start-UpCosts
BrokerageFirmsandCommissionRates
CommissionsandClients
ExecutionServices
ProfessionalServices
ChapterThree 15 CreatingYourTradingProduct
Overview
MechanicalSystems
DiscretionaryStrategies
DiversifiedStrategies
SingleSectorStrategies
StrategyDesignandTesting
SlippageControl
Institutionalvs.RetailInvestors
ChapterFour 23 MarketingYourCTABusiness
TrackRecord
RaisingFunds
AccountSizes
ProfessionalMoneyRaisers
ClientRelationships
NationalFuturesAssociationRules
ChapterFive 31 TheMeasuresofCTASuccess
PerformanceandConsistencyofReturns
LimitingDrawdowns
LengthofTrackRecord
BecomingEstablished
RatesofGrowth
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ChapterSix 35 RiskManagementforCTAs
Diversification
RiskperTrade
PositionSizesandRiskExposure
TradinginUnits
Kick-OutLevels
VolatilityMeasurementandControl
Margin-to-EquityRatio
Commission-to-EquityRatio
StopOrders
CommonQuestions
ChapterSeven 43 CTAPerformanceRecords
RegulatoryRequirements
ProprietaryPerformanceRecord
SimulatedorHypotheticalReports
CompositePerformanceRecords
RateofReturnCalculations
EstablishingYourPerformanceRecord
ChapterEight 47 CTAFees
CompensationComponents
ChapterNine 51 CTARegistrationandAudits
RegistrationRequirements
DisclosureDocuments
RecordKeepingRequirements
AuditReadiness
GeneralInformation
Records
Advertising,CommunicationsandCustomerComplaints
FeesandOrderAllocation
PerformanceRecordTesting
ManualsandDocumentation
ExitInterview
ChapterTen 59 FromFloorTradertoCTA
TheTransitionfromtheFloortoUpstairs
TheSkillsYouHaveandtheSkillsYouWillNeed
GuidetoBecomingaCTA3
TableofContents(continued)
AppendixI 63 RiskControlSystem
Courtesy,Mr.ThomasBasso
AppendixII 65 MeasuringFuturesVolatility
Courtesy,Mr.ThomasBasso
AppendixIII 67 SamplePerformanceRecord
NotestoPerformanceTable
Courtesy,Mr.MichaelLiccar
AppendixIV 71 “HowtoSurviveYourFirstNFAAudit”
FirstpublishedinMFAJournal,December1992
ByMr.ThomasP.Schneider,reprintedwithpermission
77 Glossary
81 Index
86 Resources
4GuidetoBecomingaCTA
ACKNOWLEDGEMENTS
TotheconsultingfirmofGreenwichAssociatesforsupplyingfactsandfigures
onalternativeinvestments;toSolWaksmanandTheBarclayGroupfortheirin
depthanalysisofmanagedfuturesdemographics;andtotheFuturesIndustry
Associationfortheirhelp.
ManythankstoCharlesMizrahi,aformerfloortraderontheNYFEandretired
ChiefExecutiveOfficerofHamptonInvestors,aCTAthathefounded.
ThanksaswelltoWilliamTakiwhoco-foundedBaldwinCTA,MCBFCCPO
andCFAssetManagement,LLC,andiscurrentlyco-foundingpartnerand
principalofCTA,PhoenixGlobalAdvisors,LLC.
ThanksalsotoStephenHeilman,CMEfloortrader,CTAandPresidentof
AugustanCapitalManagement,LLC.
Originalpanelsmoderatedby:Ms.PatriciaN.Gillman
Thisbookisanupdatedversionofanoriginaldevelopedin1994.Itisacompi-
lationanddistillationofremarksmadebythefollowingindividualsataseriesof
seminarshostedbyMs.PatriciaN.GillmanandChicagoMercantileExchange
inMay1992,January1993,May1993,September1993andMarch1994.Many
thankstothefollowingpaneliststhatparticipatedinthoseseminars:Included
aretheircredentialsatthetime.
Mr.GregAnderson CTAandCPO September1993
Mr.TomBasso CTA January1993
Mr.DougBry CTA March1994
Mr.DavidCheval CTAandCPO May1993
Ms.LaleenDoerrer MoneyRaiser January1993
Ms.AudreyGale CTAMarketer/Administrator September1993
Ms.PatriciaN.Gilman Attorney AllSeminars
Ms.MalindaGoldsmith CTA March1994
Mr.YraHarris FloorTraderandFormerCTA May1993
Mr.JoeKrutsinger FCM January1993
Mr.MichaelLiccar Accountant May1992
Mr.EdwinL.Miller CTAandCPO September1993
Mr.JoeNicholas CTAConsultant May1993
Mr.CraigPauly CTAandCPO May1992
Mr.JeffQuinto FCM March1994
Mr.ThomasP.Schneider CTA December1992
“HowtoSurviveYourFirstNFAAudit”
MFAJournal, AppendixIV
GuidetoBecomingaCTA5
Althoughanumberofyearshavepassedsincethosefirstseminars,thepages
stillofferthereadervaluableinsightsandusefuladviceonwhatittakesto
becomeasuccessfulCTA(CommodityTradingAdvisor).Itisoursincerehope
thatyouwillfindvalueinthewisdomcontainedinthesepages.
Abouttheauthor
Theauthor,DeanLundell,hasbeenaVicePresidentatMerrillLynchCapital
Markets,aPrincipalofaregionalinvestmentbankandis,ofcourse,aCTA.He
istheauthorofSunTzu’sArtofWarforTradersandInvestors(McGraw-Hill)
andhaswrittennumerouspublicationsforprivateaudiencesoninterestrate
derivativesandforeignexchange,corporateandinvestmentbankingandthe
fixed-incomemarkets.
Theviewsexpressedinthishandbookarethoseoftheoriginalpanelistsandparticipantsand
thosewhoofferedtheirquotesandexperience,anddonotnecessarilyreflecttheviewsofCME,
itsmembers,employeesorcontractors.Noendorsementofservicesprovidedbyanyofthe
originalpanelistsorparticipantsorcurrentcontributors,employeesorcontractorsisintendedby
inclusionoftheirremarksinthishandbook.Allmatterspertainingtorulesandspecificationsare
madesubjecttoandaresupersededbyofficialCMErulesandapplicableCommodityFutures
TradingCommissionandNationalFuturesAssociationrulesandregulations.
Tradinginfuturescontractsandoptionsonfuturescontractsisnotappropriateforallpersons.It
shouldneverbeengagedinbyanypersonwhodoesnothavesufficient,accurateandbalanced
informationabouttheinvestmentbeingconsidered,includingacleardescriptionandexplanation
oftherisks.
Examplesinthispublicationarebasedonhypotheticalfactsituationsandshouldnotbeconsid-
eredinvestmentadvice.Someoftheitemsinthispublicationarebasedonsecondarymaterials
whicharebelievedtobereliable,butwhicharenotguaranteedastoaccuracyorcompleteness.
Thispublicationwasdevelopedforgeneraleducationalpurposesandisnotasubstitutefor
anyprospectus,disclosuredocument,orotherdocumentthatisrequiredtobegivento
prospectivecustomers.
Pastperformancefiguresarenotnecessarilyindicativeoffuturereturnsorresults.
TheGlobelogo,ChicagoMercantileExchange®andCME®aretrademarksofChicago
MercantileExchangeInc.Allothertrademarksarethepropertyoftheirrespectiveowners.
6GuidetoBecomingaCTA
MARKET TRENDS FOR
ALTERNATIVE INVESTMENTS
1
CHAPTER
MarketTrendsforAlternativeInvestments
AlternativeInvestments
Alternativeinvestmentscanencompassawidevarietyofinvestmentvehicles,
amongwhicharecertainfixed-incomeinstruments,equityrealestate,private
equity,hedgefunds,andofcoursemanagedfutures.
Thetrendforinstitutionalparticipationinalternativemarketsisclearlyonthe
riseonaglobalbasis,withtheexceptionofJapan.Geographicareasthat
haveseenthegreatestexpansioninallocationstothisbroadassetcategory
areNorthAmerica,continentalEurope,theUnitedKingdomandAustralia.
Asofearly2004,allocationstoalternativeinvestments,includingmanaged
futures,comprisealmost14percentofinvestmentdollarsinAustralia,
(althoughthatisarelativelysmallmarket),9.5percentinCanada,7.5percent
intheUnitedStates,8percentincontinentalEurope,and7percentinthe
UnitedKingdom,whileJapanlagsatonly0.6percent.
Thereisawidedisparityamonginstitutionalinvestorsinregardtotheper-
centagesoffundstheyhaveinvestedinalternativemarkets,particularly
betweenpensionfundsandendowmentfundsandfoundations.Onaglobal
basis,endowmentfundsandfoundationsaremostinvolvedinthesemarkets,
withroughly20percentoftheirassetsinalternativeinvestments,whilepen-
sionfundslagthistrendsignificantly.
Thegrowthinmanagedfuturesoverthepast25yearshasbeentrulyexpo-
nential.AccordingtoTheBarclayGroup,whichmonitorsassetsunderman-
agement,CTAs(CommodityTradingAdvisors)weremanaging$310millionin
1980.By1990,thatfigurewas$10.5billion;by2000itwas$37.9billonandin
2003ittotaled$86.5billion.Thesefiguresareechoedinthesubstantial
increasesintradingvolumeonfuturesexchangesaroundtheglobe.
Electronictradinghascertainlyplayedamajorroleincontributingtothis
extraordinarygrowth.Thereisnomistakingthetrend.Formoreinformation,
visitwww.barclaygrp.com.
Evenhedgefunds,whichhavetendedtoeschewtheinstitutionalmarket
becausetheywereunwillingtorevealcertainportfoliocharacteristics,arenow
participatingextensivelyinmanagedfutures.AsaCTA,andthereforeasan
institutionalinvestor,youwillhaveafiduciaryresponsibilitytoperformdue
diligence.Youwillnothavetorevealeverything,butyouwillhavetobepre-
paredtoexplainthevaluepropositionofyourtradingprogram.
GuidetoBecomingaCTA7
MarketTrendsforAlternativeInvestments
Theprincipalreasoninstitutionalinvestorsparticipateinthemanagedfutures
marketisthenon-correlationoffuturesreturnstotraditionalequityanddebt
investments.Althoughfuturesprovideanattractivevehiclefordiversifyingtotal
portfoliorisk,managingandmonitoringfuturestakesadisproportional
amountofresourcesonthepartofinvestors.Therefore,oneofthemost
effectivewaysaCTAcansecureassetstomanagefromtheseinvestorsisto
makeiteasy—andworthwhile—forthemtodojustthat.
8GuidetoBecomingaCTA