The
term "Managed Futures" refers
to a 30-year old industry
made up of professional
money managers who are known
as "commodity trading advisors"
(CTA's).
Managed
futures are the systematic
or discretionary trading
of futures contracts by
professional CTA's who trade
in global futures and options
markets, as either buyers
or sellers of contracts
representing real assets.
These real underlying assets
include, but are not limited
to gold, silver, wheat,
corn, coffee, sugar. oil,
heating oil, government
bonds, equity market indices
and currencies. The CTA
makes all trading decisions
on behalf of the client
through a revocable limited
power of attorney.
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A
CTA is a Commodity Trading
Advisor. A CTA is an individual
or organization which, for
compensation or profit,
advises others as to the
value of or the advisability
of buying or selling futures
contracts or commodity options.
Providing advice indirectly
includes exercising trading
authority over a customer's
account as well as giving
advice through written publications
or other media.
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Over the long-term, managed
futures have provided valuable
diversification to a traditional
portfolio of equities and
bonds. Managed futures
have been shown to provide
returns with little or no
relationship to the timing
and magnitude of the returns
associated with traditional
securities.
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Managed futures programs
have different minimum investment
requirements. Usually,
the amount is what the advisor
and brokerage firm consider
is needed to achieve account
diversification. Minimum
account size may also be
affected by whether the
managed account program
is designed to serve individual
investors or institutional/corporate
clients. In managed
futures, minimum investments
can start as low as $10,000,
but more typically $25,000
or more per managed account.
ALTAVRA, does offer managed
forex accounts starting
as low as $5,000 per managed
account.
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In a private managed account,
typically, the only restriction
is that you do not make
withdrawals below the minimum
required investment.
You will be free to withdraw
all funds after liquidation
of any open positions, unless
the account agreement you
have signed stipulates otherwise.
You may request liquidation
of open positions at any
time through a revocation
of trading authority.
If you have accumulated
any profits in the account,
you are allowed to withdraw
them or leave the money
available for reinvestment.
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You will receive a detailed
statement each time a trade
is entered into or exited.
You can choose to have these
statements sent to you by
either email or U.S. mail.
Your account is also accessible
online at any time.
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Generally
speaking, because managed
futures have little correlation
to stock and bond markets,
it is quite difficult to
make a comparison. It may
be common practice for investors
to dissect the individual
elements of their portfolio
and expect them to compete
with one another over every
time period. However, effective
and prudent asset allocation
would suggest that:
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::
Managed futures
should not be
looked at in
isolation from
the rest of
the portfolio,
nor should they
be examined
in relation
to the stock
market.
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::
It is very important
to have a balanced
approach toward
investing, to
understand the
rationale behind
allocating portions
of assets to
different investment
classes, styles
or instruments,
and to always
keep the long–term
goals in mind.
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::
Different instruments
within a portfolio
should complement
each other,
not compete
with each other.
It is important
to remember
that different
investments
derive profitability
from a variety
of economic
and market scenarios,
and that investments
will not all
perform well
at the same
time.
Otherwise, all
investments
would make money
together and
all would lose
money together.
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With
prudent allocation, managed
futures may help reduce
the overall risk of a portfolio.
In our opinion, a prudent
investor should ensure that
at least a portion of their
portfolio is allocated to
an alternative asset that
has the potential to perform
well when other portions
of the portfolio may be
underperforming.
Other potential benefits
of managed futures may include:
::
Historically
competitive returns over
the longer term
::
Returns
independent of traditional
stock and bond markets
::
Access
to global markets
::
The
unique implementation of
traditional and non–traditional
trading styles
::
Potential
exposure to as many as one
hundred and fifty markets
globally
::
Liquidity
and no lock–ups. The contracts
in which the CTA's trade
typically have a high degree
of liquidity.
If
suitable to a client's objectives,
devoting five to fifteen
percent of a typical portfolio
to alternative investments
has been shown to increase
returns and lower volatility.
Because alternative investments
may not react in the same
way as stocks and bonds
to market conditions, they
can be used to diversify
investments across different
asset classes, resulting
in less volatility and less
risk. The other attractive
feature of the ALTAVRA Managed
Futures product is that
there are no lock–up of
funds or penalties for early
withdrawals.
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During
times of market volatility
or declining stock and bond
markets, managed futures
may be an important part
of your portfolio. The ALTAVRA
blended portfolios are customized
structured products, which
over time are designed to
provide investors with exposure
to a set of strategies with
little correlation to the
stock and bond markets.
In the event of a major,
sustained downturn of the
equity or fixed income markets,
managed futures may potentially
provide some protection
for a client's overall portfolio.
Increasingly sophisticated
institutional investors
such as pension funds, endowments,
foundations, and family
offices are allocating larger
portions of their portfolios
away from equity and fixed
income into alternative
investments. Managed futures
are a sub–class of alternative
investments.
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Quite simply, no.
Futures investing is a speculative
and tends to be cyclical.
Additionally, even the most
successful professional
traders experience periods
of flat returns or even
draw-downs. Consequently,
losses will be incurred
for those trading periods.
In our opinion, the wise
investor will remain steadfast
in his/her investment plan
and not close the account
prematurely in order to
allow the account to potentially
recover from those temporary
losses in equity.
It would not be a wise investment
strategy to open an account
that you do not intend to
maintain for at least three
to five years.
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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 and those who manage
customer accounts must be
members of the NFA. Advisors´
Disclosure Documents are
required to be submitted
to the NFA for review in
advance of distribution
to prospective investors.
On an ongoing basis, the
NFA audits Disclosure Documents
(particularly performance
information), promotional
materials, and trading activities.
Many CTA's update their
performance data on a monthly
basis. Violations of CFTC
or NFA rules can result
in financial penalties,
suspension or complete cessation
of trading privileges and
other penalties.
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There
are basically three types
of charges involved when
a managed account is handled
by a CTA. An annual management
fee usually between 1–2
% of the value of your account
is charged for the overseeing
of the trading in your account.
Normally this fee is charged
in monthly, for example
a 2% annual fee would result
in a 0.1667% monthly charge
being applied to the account.
Most CTA's also charge a
performance incentive fee
which typically runs from
15% – 25% 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. If the manager
has not generated a new
net profit in the account,
the incentive fee is not
charged during that period.
Other costs associated with
a managed futures account
include brokerage costs,
exchange and regulatory
association fees.
ALTAVRA
does NOT charge a load,
upfront or initial fee on
any account.
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We
recommend that the amount
of money you invest be based
on your own financial goals
and risk tolerance. This
should usually be approximately
5% to 20% of your overall
portfolio. Only risk capital
should be used in managed
futures or any speculative
investment. 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 broker before you invest.
After your questions have
been answered and you feel
this type of investment
is appropriate for you,
we will assist you in completing
the account opening forms
and CTA management agreements.
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Yes.
According to the Tax Act
of 1981, short–term profits
(held for less than one
year) in commodities are
treated as 60% long term
and 40% short term. On the
other hand, short–term trading
profits in stocks are treated
as 100% short term. For
individual investors in
higher tax brackets, this
tax treatment can mean saving
as much as 30% on taxes
on short–term gains on commodities
versus stocks. ALTAVRA strongly
recommends that you should
discuss taxation with an
independent qualified tax
advisor.
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Managed
futures are not appropriate
for everyone. A determination
must be made as to a particular
investor's suitability.
The investor should be provided
with all of the necessary
information to make sure
he or she understands both
the risks and possible rewards
of this type of investment.
In addition to having the
required risk capital, an
investor needs to have realistic
expectations about returns
on investment and tolerance
to draw-downs that may occur
with managed futures products.
The risk of loss always
exists in futures trading
no matter how skilled a
trader an individual CTA
may be.
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The top mistake is probably
jumping around from manager
to manager frequently.
This doesn't mean that you
necessarily have to stick
with one manager, but running
from draw-downs and/or chasing
profits is, in our opinion,
not the best idea when investing
in managed futures.
ALTAVRA strongly recommends
approaching your investment
in managed futures with
a three to five year holding
period.
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CTA's
and CPO's (Commodity Pool
operators) are required
to file disclosure documents
with the NFA. The basic
disclosure requirements
are intended to ensure that
potential investors will
be apprised of material
facts regarding managed
investments and advisors
so that they can make an
informed decision about
a particular investment
or advisory service before
committing their funds.
The CFTC in November 1997
delegated to the NFA the
authority and responsibility
to conduct the reviews of
disclosure documents of
both CTA's and CPO's required
to be filed with the commission.
Only
upon satisfactory review
of the disclosure documents
and subsequent approval
by the NFA can a CTA or
CPO offer his disclosure
document to the public for
consideration. Disclosure
documents provide biographical
information on the CTA and
generally reviews the trading
style and account management
philosophy of the CTA as
it applies to that particular
program. The document will
also contain a review of
the trading program along
with a list of all fees,
potential conflict of interest
issues, and a description
of the CTA's risk management
methodology.
Performance
records are also reviewed
showing the net trading
results after costs have
been deducted.
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There
are some individual investors
who are highly successful
in directing their own futures
trading if they have the
knowledge, experience and
resources to do so. However
the vast majority of self
directed investors have
struggled in their efforts
to become successful in
futures trading. Studies
indicate that as many as
nine out of ten self directed
traders lose money. When
it comes to managed futures,
of the 119 funds and pools
in the Managed Account Reports
Fund/Pool Qualified Universe
Index that traded from January
1990 through October 1996,
81% were profitable over
the full time period. (Source:
MAR)
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Investors
should take particular note
of the managers performance
record. However, this in
itself should not be the
sole reason for choosing
a specific CTA. As mentioned
above, the disclosure document
spells out an advisors philosophy
and trading style. This
should be reviewed along
with the track record in
making your decision. Track
records are important and
should show performance
tables, spanning several
years or more. A strong
performance over a short
period of time may be nothing
more than good fortune.
However, positive performance
over a long period of time
especially in markets that
have experienced bull bear
and flat trading ranges
speak volumes about a CTA's
trading abilities.
Track
record components to take
careful note of:
::
Length
of the trading program:
Good fortune or sustainable
investing?
::
Worst
peak to valley drawdown:
Could your account be profitable
assuming worst entry?
::
Assets
under management:
Has the manager significant
assets under management?
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Correlation indicates the
strength and direction of
a relationship between two
investments. Correlation
is measured by calculating
the correlation coefficient.
The correlation coefficient
will always be a number
between -1.0 to +1.0.
A negative correlation coefficient
(closer to -1.0) indicates
a negative relationship,
in that as one investment
goes up, the other would
tend to go down. A
positive correlation coefficient
(closer to +1.0) indicates
a positive relationship,
in that as one investment
goes up, the other would
tend to go up also.
If the correlation coefficient
is close to zero, this would
indicate that there is no
correlation or very little
relationship between the
two investments. The
general idea of portfolio
theory is to combine multiple
investments with as close
to a zero-correlation as
possible (essentially combining
investments that are not
related to one another).
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A
commission or sales fee
charged by the broker at
the time of the initial
purchase for an investment.
The broker who charges front
end load fees have the investor
to read and sign a break
even analysis.
ALTAVRA does NOT charge
a load, upfront or initial
fee on any account.
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Notional
funding is the term used
for funding an account below
its nominal, or face value.
Anyone who has been involved
in futures, options or foreign
exchange knows that an account
with a nominal value of
$1,000,000 does not necessarily
mean that there is $1,000,000
cash in the account. Accounts
may be funded for less than
the $1,000,000 as long as
the cash deposited meets
the margin requirements
set by the exchange or the
futures commission merchant.
The difference between the
nominal value and the cash
actually deposited is called
notional funding.
To
illustrate, let's assume
that a commodity trading
advisor has a minimum nominal
amount of $1,000,000, and
the margin requirement is
$50,000. The investor can
either deposit $1,000,000
to fully fund that minimum
investment requirement or,
alternatively, can invest
only a portion of the $1,000,000,
as long as that meets the
$50,000 margin requirement.
Assuming that the investor
decides to fund the $1,000,000
account with $100,000. This
means that the investor
is using leverage of 10X
- 10 x $100,000 = $1,000,000,
the minimum investment.
The difference between the
nominal value ($1,000,000)
and the cash deposited ($100,000)
is $900,000. The $900,000
is referred to as notional
funding.
Investors
are interested in using
notional funding because
the notionally funded amount
(in this case, the $900,000)
is not borrowed or deposited.
The cash ($100,000) is a
good faith deposit for the
full value of the account.
In other words, the $100,000
trades as if it were $1,000,000,
even though the investor
only deposited $100,000
and is not paying interest
or has not otherwise borrowed
the remaining $900,000.
If the account is doing
well, the investor earns
money on the full $1,000,000
— even though he only funded
the account with $100,000.
If the account is not doing
well, however, the investor
is responsible for the amount
lost, regardless of the
cash the investor originally
deposited.
For
example, assume that the
account has a profitable
year, and the CTA reports
profits of 20 percent ($1,000,000
x 0.20 = $200,000) for the
fully funded account. The
account that was only funded
with $100,000 also had $200,000
in gains — but the investor's
profit percentage was 200
percent, because the investor
earned $200,000 on a $100,000
investment.
Investors
must be aware, however,
that this is a double–edged
sword. If the account has
a drawdown, the investor
will suffer a significantly
larger percentage decline
than the fully funded account.
If the example above suffered
a 20–percent drawdown for
the fully funded account,
the notionally funded account
would have a 200–percent
drawdown. In such a situation,
the investor would not only
have lost his initial $100,000
investment, but an additional
$100,000 on top of it. Furthermore,
to keep the account open,
the investor would have
to deposit at least enough
cash to cover the margin
requirement. In this regard,
notional funding significantly
increases the volatility
of an account. Investors
must ensure that they understand
how much leverage the CTA
is using and the consequences
such leverage might entail.
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The
total percentage return
of an investment over a
specified period, calculated
by expressing the difference
between the investment's
initial price and final
price as a percentage of
the initial price.
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This
is the rate of return which,
if compounded over the years
covered by the performance
history, would yield the
cumulative gain or loss
actually achieved by the
trading program during that
period.
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A
percentage figure used when
reporting the historical
return such as a three,
five or ten year average
returns for a CTA program.
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Each
monthly rate of return =
((VAMI at end of month /
VAMI at beginning of month)
– 1)
Standard
deviation = SQRT ((Sum(monthly
ROR – average monthly ROR)
^ 2)) / # of months)
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The
Sharpe ratio is a measure
of risk–adjusted performance
that indicates the level
of excess return per unit
of risk. In the calculation
of Sharpe ratio, excess
return is the return over
and above the short–term
risk free rate of return
and this figure is divided
by the risk, which is represented
by the annualized volatility
or standard deviation.
In
summary the Sharpe Ratio
is equal to compound annual
rate of return minus rate
of return on a risk–free
investment divided by the
annualized monthly standard
deviation. The greater the
Sharpe ratio the greater
the risk–adjusted return.
As calculated on the individual
reports the Sharpe ratio
is calculated as follows;
(Compound Annual ROR – risk
free ROR (calculated from
T–bills)) / Annualized Std.
Dev. of Mo. ROR or Annualized
Std. Dev. of Quarterly ROR
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A
value representing the potential
loss that may arise from
risk as measured against
a minimum acceptable return.
Downside deviation aims
to isolate the negative
portion of volatility.
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An
investment is said to be
in a drawdown when its price
falls below its last peak
.The drawdown percentage
drop in the price of an
investment from its last
peak price. The period between
the peak level and the trough
is called the length of
the drawdown period between
the trough and the recapturing
of the peak is called the
recovery. The worst or maximum
drawdown represents the
greatest peak to trough
decline over the life of
an investment. The drawdown
report presents data on
the percentage drawdown's
during the trading program's
performance history ranked
in order of magnitude of
loss.
::
Depth:
Percentage loss from peak
to valley
::
Length:
Duration of drawdown in
months from peak to valley
::
Recovery:
Number of months from valley
to new high
::
Start
Date: Month in which peak
occurs.
::
End
Date: Month in which valley
occurs.
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Drawdown
= (1 – Valley VAMI / Peak
VAMI) (X 100 for %)
Example:
Peak VAMI = 2000, Valley
VAMI = 1500
Drawdown
= 1 – 1500/2000 = .25 or
25%
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The
average time in a drawdown
as measured from the previous
peak to a new peak (New
high ground). If the program
is still in a drawdown,
the calculation assumes
that the drawdown is over.
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A
Value Added Monthly Index
(VAMI) table, is the industry
standard for evaluating
the performance of investment
managers. It indicates the
value a manager has added
to an investment via a cumulative
index and because it excludes
non-trading expenses such
as tax, it can be used to
compare investment managers
around the world. The column
headed "VAMI" within a table
shows how an initial $1000
investment has grown over
time.
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Please email
clientservices@altavra.com
or for an immediate answer
call 1-800-998-7870 or +1-561-829-8291
(international).
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THE RISK OF LOSS IN TRADING
FUTURES, OPTIONS AND OFF-EXCHANGE
FOREX CAN BE SUBSTANTIAL.
PAST RESULTS ARE NOT NECESSARILY
INDICATIVE OF FUTURE RESULTS.
Disclosure
Statement
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