First of all, what is a Commodity Trading Advisor?
For short, they are called CTA's. A Commodity Trading Advisor invests in the Commodity Futures Markets
and tries to make a profit. Usually they are managing large dollars of capital and CTA's performance
is tracked to show their quarterly profits and losses. Commodity Trading Advisors typically have Managed
Funds or Pools that they trade for. Whereas the typical Commodity Broker will place order of 1 or 2 contracts
at a time, a CTA may place a hundreds. Considering the dollars they manage, it will be curious to see
what type of profits they show.
CTA's - Profits or Losses?
We did a little research with the help of
CTA-Info. They track Commodity
Trading Advisors' returns and compare to the S&P and the Long Bond Index. This is their criteria for their index:
The CTA-Info Global Managers Index contains all managers and their programs who have at least 1 year of performance history. The index is constructed by taking all
managers that meet this criteria and combining their monthly performance to create a hypothetical performance composite. The index is not weighted in any manner, and
only reflects actual performance of the managers that are included.
The results from 1996 to 2006 show an average annual return of 15.21%. This is nearly twice the return
for the S&P and the Long Bond Index for the same period. Quite Impressive!
How Commodity Trading Advisors Acheive Superior Returns
It is fairly simple, they take more risk by investing / trading commodities, futures and options. The key here is
that they have "controlled" risk. They don't use the Vegas mentality and bet on long shots. Most Commodity Trading
Advisors have a systematic or technical approach to trading. They have a trading plan and they stick to it.
Part of this plan is controlling their losses. Typically, they risk a very small percentage of their equity
on any trade or market - usually less than 2%. Very large CTA's may have a figure as a fraction of 1%. In a simplistic form,
CTA's have a proven trading plan that works...they stick to it...they control their risk...discipline and money management
then become the key.
Compare this to the approach of the Newbie Commodity Trader. Mr. Newbie open an account because he thinks
we will have a drought and soybeans will skyrocket. He either buys 10 out of the money options with his $10,000
or he goes long about 5 futures contracts. The typical result is the market will become more volatile during the spring
or summer and the market will dip causing a margin call or his account is wiped-out. Maybe the market maoves a little higher over a period of time.
That would be good for his options-right? Maybe not. The time value of his options erodes daily, so in order for him to make a good profit, he
needs a fairly quick and sizeable move. Believe me, this happens everday in the markets by new and even experienced traders and probably always will.
So, the difference between the Commodity Trading Advisor and the typical new commodity trader is quite easy to see.
CTA's are educated on the markets and take a disciplined trading approach. The Newbie usually "wings it" and does
not have the patience to learn. I will say that most people are not successful traders on day one. It typically
takes a few years of steady trading, mentoring and learning to become successful...if you can become sussessful.
There is plenty of money to be made in the Commodities Markets. I suggest that newer or unsuccessful
traders study how Commodity Trading Advisors trade. There is plenty of information out there if you want
to put the time in. Believe it or not, many of their trading strategies are not big hidden secrets. They use
alot of techniques you can find in periodicals and trading books.
More in-depth articles to follow. Check back regularly.
Disclaimer: TRADING IN COMMODITY FUTURES OR OPTIONS INVOLVES SUBSTANTIAL RISK OF LOSS. PAST RESULTS ARE NOT NECESSARILY INDICATIVE OF FUTURE RESULTS.