Commodity Trading Advisor or CTA
A trading firm or person that will manage trading accounts for investors. Some key attributes that separate a CTA from other styles of trading investments in the futures & commodities world include:
- CTAs publish what is a called a “Disclosure Document.” It details information about the CTA, the trading style or strategy, markets traded, if options are used, starting minimums, performance data, and principal background. CTAs publish performance net of any and all fees. The performance in promotional documents reflect a composite of all accounts in their trading program and that performance should be reviewed in conjunction with the Disclosure Document.
- The CTA manages the accounts via a limited Power of Attorney (POA). An investor will have their own individual segregated account: that is, their account and the traded futures contracts are not co-mingled with anyone else’s trades unlike a pool or a fund which are.
- A CTA program has two types of fees that typically can be charged:
- A management fee | This fee often ranges from 0% to 2.25% annually, usually billed monthly or quarterly in arrears. The fee is calculated as a percentage of the annualized asset value in the account on the end-of-month or end-of-quarter date.
- An incentive fee | The CTA charges a percentage of profits. This is the “incentive” the trader has in order to make money for the client. The incentive fee is only charged on net profits, net meaning after prior incentive fees and all costs of trading have been deducted.
- RISKS – While the benefits of using CTAs to manage your futures investments are numerous, there is no way to completely eliminate risk. Investments in futures contracts are inherently risky due to the significant leverage involved in the type of contracts traded. Each investor must carefully consider whether these types of investments are appropriate for them. Only true risk capital should be used to invest in futures, including CTA-directed programs.
- A Foremost Trading Broker can assist you with selecting a CTA.
Notional Funding of Accounts: Some CTAs will allow what is called “notional funding” (NF). This feature would be both disclosed and described in detail in the CTA’s Disclosure Document. Notional funding is appropriate if:
- You are comfortable with the CTA’s track record and
- You want to trade the CTA program more aggressively. Keep in mind that more aggressive trading carries additional risk.