A professionally managed futures account is like any other brokerage account established to trade futures except that you give permission to make all trading decisions on your behalf through a revocable power of attorney to a Commodity Trading Advisor (CTA). In this sense, the advisor is the account “manager.” The advisor’s compensation is normally a management fee plus an incentive fee contingent on profitability.

Typically, individual investors seeking the profit opportunities of futures trading without the responsibility and demands of day-to-day account management have sought out managed futures accounts. However, growing numbers of corporate and institutional investors have been allocating some portion of their total portfolio assets to specially designed and professionally managed futures trading programs. The total amount of capital in managed futures programs is estimated to exceed $300 billion. Keep in mind there is risk of loss regardless of who is managing your account.

Several factors have played a role in the growth of managed futures. First, as traditional investment markets have become increasingly volatile and vulnerable to often-unexpected events, institutional money managers and other sophisticated investors have sought to more effectively manage overall portfolio risk through diversification.

Second, a number of academic studies indicate that a portfolio that includes managed futures can yield an appreciably higher and more stable return over time than a portfolio that includes only stocks and bonds. The same evidence indicates this can be achieved without added risk, or even reduced risk.

A third factor is the tremendous broadening of futures markets to now encompass stock indexes, debt instruments, currencies and options as well as conventional commodities. This has created whole new categories of profit opportunities. The increasingly global nature of today’s futures markets also has expanded the scope of investment opportunities.

Finally, from the standpoint of an individual investor, managed futures accounts have proven to be considerably more profitable on average than accounts that individuals trade on their own. top

BE ADVISED THAT DIVERSIFYING ONE’S PORTFOLIO WITH MANAGED FUTURES DOES NOT GUARANTEE PROFIT, OR PROTECT A PORTFOLIO FROM SUBSTANTIAL LOSSES OR VOLATILITY. AN INVESTMENT IN MANAGED FUTURES MAY HELP ENHANCE RETURNS AND REDUCE RISK. HOWEVER, THEY MAY ALSO DO JUST THE OPPOSITE AND IN FACT RESULT IN FURTHER LOSSES. THE RESULTS OF STUDIES CONDUCTED IN THE PAST MAY NOT BE INDICATIVE OF CURRENT TIME PERIODS AND MAY NOT REFLECT THE PERFORMANCE OF ANY INDIVIDUAL CTA.

Stocks are represented by the S&P 500 Total Return Index from December 1990 to the end of Data and by the S&P 500 Price Index adjusted for dividends from January 1990 through November 1990. The S&P 500 indices are designed to reflect all sectors of the U.S. equity markets. The S&P 500 includes 500 blue chip, large cap stocks, which together represent about 75% of the total U.S. equities market. Companies eligible for addition to the S&P 500 have market capitalization of at least US$3.5 billion. The TR Index accounts for the reinvestment of dividends.

Bonds are represented by the Barclay’s US Aggregate Bond Index (formerly known as the Lehman US Aggregate Bond Index). The U.S. Aggregate Bond Index is a broad-based benchmark that measures the investment grade, U.S. dollar-denominated, fixed-rate taxable bond market, including Treasuries, government-related and corporate securities, MBS (agency fixed-rate and hybrid ARM pass- throughs), ABS, and CMBS. The U.S. Aggregate rolls up into other Barclays Capital flagship indices such as the multi-currency Global Aggregate Index and the U.S. Universal Index, which includes high yield and emerging markets debt. The U.S. Aggregate Index was created in 1986, with index history backfilled to January 1, 1976.

Managed Futures are represented by the Autumn Gold CTA Index. The Autumn Gold CTA Index is comprised of the client performance of all CTA programs included in the AG database and does not represent the complete universe of CTAs. CTA programs with proprietary performance are not included. Monthly numbers are updated until 45 days after the end of the month.

Trading futures and options involves substantial risk of loss and is not suitable for all investors. There are no guarantees of profit no matter who is managing your money. An investor must read and understand the Commodity Trading Advisors current disclosure document before investing. Past performance is not necessarily indicative of future results. This matter is intended as a solicitation to invest in managed futures. Be advised that an individual cannot invest in the index itself and the actual rates of return for an individual program may significantly differ and be more volatile than the index.

No. Like most markets, futures tend to be cyclical. In addition, even an advisor who is highly successful over the course of a year probably will experience losses in some months. Thus, it is recommended that you enter a managed futures investment with the intent to maintain it for at least three years. This allows the account to recover from any temporary losses in equity and to benefit from longer-term returns. Keep in mind there is risk of loss regardless of who is managing your account.

There is risk in trading futures, no matter whether you trade on your own or have a managed futures account. The same leverage and price movements that can produce trading profits can produce trading losses. Any loss that can occur when an individual directs his own account also can occur in a professionally managed futures account. However, one of the things that you should definitely look for in a trading advisor is a long-term demonstrated ability to manage risk

As in most areas of investment, trading experience and skill are major determinants of trading success. Profitable futures trading requires the discipline and temperament to recognize and act on the differences between market expectations and market realities. It requires development and implementation of carefully considered trading plan, strategies and system. It requires a keen knowledge of when and how to liquidate positions. It requires understanding how to diversify an account based on how various markets react with and to one another. Indeed, even institutional and corporate portfolio managers who may have experience with futures for hedging applications, often choose to use professional CTAs to manage their futures trading investments.

Definitely. In any given year, some will realize impressive profits and others will incur losses. The success of your managed account will depend on the success of the advisor you select.

In any endeavor, some individuals are better at what they do than others. For CTAs, a track record is the indication of past performance. However, past performance is no guarantee of future results. An advisor who has performed well in the past may perform poorly in the future. And it is possible that someone who has performed poorly may begin to perform well. Besides performance, look to the track record to reveal other valuable information about an advisor’s experience, approach to trading and amount of money under management. You’ll also want to note whether performance data included in the disclosure document refers to “actual” trading results or to “hypothetical” or “simulated” results.

Start by considering the length of the record. Sprinters aren’t necessarily successful distance runners. Sensational performance in a short time span may reflect little more than extraordinarily good luck. Or, of more concern, it may reflect someone who takes greater risks than you may be comfortable with over the long haul. Or it could reflect specialization in markets that, in a given period, were especially active. Track records can be much more meaningful when you examine a longer record. This provides more information about how an advisor has performed over the landscape of continuously changing market scenarios. An advisor’s performance in less-than-spectacular years may be an important indicator of risk management skills.

Your trading advisor will determine this and in all likelihood it will be different markets at different times. Futures contracts are available in the following sectors:

CTAs can vary in what they trade, how they trade and what tools they use to make a trading decision. Some advisors specialize in particular areas, such as financial instruments, metals, or agricultural products, while others pursue profit opportunities in whatever markets they appear to exist. They may differ in how aggressively or conservatively they participate in the markets. Another difference is whether the advisor employs a fundamental (supply/demand information) or technical (charts, indicators, etc.) trading system. Even then, different advisors have developed and employ different systems and may read the markets differently. Moreover, the fundamental/technical distinction has broken down somewhat as fundamental advisors frequently employ technical tools to pinpoint the timing of their trading decisions.

Your money is held in a customer segregated account at our clearing firm, Ironbeam. While the trading advisor will direct trading for the account, Ironbeam performs all other account functions.

Commodity Trading Advisors are regulated by the Commodity Futures Trading Commission (CFTC) and by the National Futures Association (NFA), the congressionally authorized self-regulatory organization of the futures industry. All trading advisors must be registered with the CFTC; those who manage customer accounts must be members of the NFA. Advisors’ Disclosure Documents are required to be submitted to the CFTC for review in advance of distribution to prospective investors.Violations of CFTC or NFA rules can result in a loss of trading privileges and other penalties.

Heritage West provides a complete summary of all activity in your account online. In addition, email and/or paper statements are available.

There are three basic ones. First, because of the risk, futures trading in any form may not be appropriate for a given person, even if a managed account seems more attractive than do-it-yourself trading. Unless you’re comfortable with the risk level and feel it’s appropriate for you, it would be prudent not to invest at all. Second, an investor might select an advisor based solely on whether the advisor is currently hot. A prudent investor will select a CTA based on the money management skills and a trading style that has been employed in the past to achieve consistent returns. Lastly, investors engage in “account jumping,” or prematurely closing accounts out of panic and fear when experiencing a period of flat returns or drawdowns. By doing this, the investor loses the opportunity to potentially recover from what might turn out to be temporary losses in equity and benefit from longer-term returns.

Three types of charges are involved when a managed futures account is handled by a CTA. One, a management fee of usually 1%-4% of the value of your account is charged for overseeing the trading in your account. Two, most CTAs charge an incentive fee that typically is 15%-30% of the cumulative net trading profits, calculated at the end of each quarter. The net trading profits are the combined total of profits and losses from trading. Often, a CTA will negotiate a lower (or no) management fee in exchange for a higher incentive fee. We particularly like these arrangements because they can mean that the person making the trading decisions on your behalf makes no money until you do. Three, brokerage commissions of $10-25 per side plus a few dollars in exchange and regulatory fees also are charged.

Yes, but different managed account programs have different minimums, all of which will reflect the amount the advisor considers adequate to achieve appropriate account diversification. At the top end, the best CTAs have $100 million or more under their management, and may not wish to bother with accounts of less than $1 million. The CTAs with the worst track records will take anything that they can get. We look for traders who have a profitable track record at least two to five years, and who have a program that could be advantageous for an investor with $40,000 to $500,000 of risk capital.

Managed accounts offer a high degree of liquidity. You have complete control over your account and can deposit additional funds, withdraw funds, or stop trading anytime. Usually, the only restriction is that you do not make withdrawals that would bring your account below the minimum required investment. You are free to withdraw all funds after liquidation of any open positions. This can be done at any time you choose unless the account agreement stipulates otherwise. Similarly, if there are profits in the account, you are free to withdraw them or leave the money available for reinvestment.

CTAs are federally licensed and registered professionals who manage investors’ assets in the futures markets, just as a stock mutual fund manager would manage assets in the stock market. CTAs are required by the federal government to submit a disclosure document that outlines who they are, states the fees and expenses charged to accounts, and reveals their performance track record.

We recommend that the amount of money you invest be based on your financial goals and risk tolerance. For many people, this is usually 5%-20% of the overall investment portfolio. Importantly, only risk capital should be used to fund a managed futures account. Before opening an account you must be supplied with a copy of the CTA’s disclosure document. Read it carefully and go over any questions you have with your Heritage West broker before you invest. After your questions have been answered and you feel this type of investing is appropriate for you, we will help you complete both the CTA management agreement and the Ironbeam customer agreement forms, which you will then return to our offices for processing. 

Trading your own account limits your returns to your own trading ability and trading system. By employing CTAs who have a good performance record, you are developing a diversified portfolio of your own. Thus, you may potentially gain greater benefits from having futures in your portfolio.

Absolutely. Managed futures may be appropriate for the long-term profile of retirement plans. You can choose those products that offer a level of volatility appropriate to your retirement objectives. And, managed futures can diversify your retirement funds among asset categories with low to negative correlation.

All types of investment have risk, be it stocks or managed futures. However, it is important to understand that the use of leverage available in futures creates the potential for unlimited risk. The prudent use of this leverage is one of the most important money management rules in futures trading. Stocks and futures are both investment vehicles employed by money managers as a means of making profits. Some managers succeed where others falter. Remember, it’s not the investment vehicle that makes or loses money, but rather the money manager’s skills and abilities that will determine results.

In his June 2002 academic study, “Benefits of Managed Futures,” Thomas Schneeweis, professor of finance at the University of Massachusetts, states: “Managed futures are not more risky than traditional equity investment. Investment in a single commodity trading advisor is shown to have risks and returns, which are similar to investment in a single equity. Moreover, a portfolio of commodity trading advisors is also shown to have risks and returns which are similar to traditional equity portfolio investments.”

Profits resulting from futures trading (presuming positions are held for less than one year) are taxed as 40% short-term capital gains and 60% long-term capital gains. In comparison, profits in stock positions held one year or less are treated as 100% short-term. Please consult your tax advisor for how this may affect your tax situation.