Happy New Year everyone! With the holidays behind us, I thought this would be a good opportunity to look at new business opportunities for the upcoming year. I work almost exclusively in the managed futures space. In speaking with brokers, I have found that they tend to be segregated into those who work primarily in transactional business, retail brokerage and hedging, and those who focus on managed futures accounts. Many transactional brokers know that commodity trading advisors (CTA’s) are out there, but they don’t know how they can become involved in that side of the business.
The first question one should ask is, “why should I get involved with managed futures?” The biggest objection I run into when talking with transactional brokers is giving up control over trading their customers’ accounts. This is a natural reaction as nobody likes to give up control over their business. But I’m going to ask that you take a minute to be honest with yourself. Over the years, how many of your clients have been consistently profitable with your trading recommendations? Be honest. For most of you, this will be a relatively small number. If you are one of the few who has been consistently profitable, congratulations. You should probably consider becoming a CTA yourself!
The average transactional broker has to wear many hats. He has to analyze the markets, and follow them throughout the day. He has to contact all of his clients in order to obtain trading authorization. He has to watch his open trades and decide when to take profits or a losses. Oh and he might want to do some prospecting in there to grow his book. At the very least it is the job of two or three people, and in my experience, some aspects of the job suffer when you try to do it all.
Managed futures is an extremely scalable business, and I would argue, it’s a very efficient division of labor. Once you partner with CTA’s you believe in (more on this later), the trading aspect of your day is now covered by someone whose sole purpose is to handle the trading. The time you once had to spend analyzing and watching the markets is now free for you to become an equity raising machine. In addition, customers sign a limited power of attorney with the CTA, so you no longer have to receive trading authority for each trade. More time for the broker to prospect, prospect, prospect.
I know that giving up control over your customers’ accounts is a mental hurdle. I hope that you can be honest with yourself enough to know that there may be traders out there who do a better job of this than you do (or at least as good). But I am realistic enough to know that this transition to offering managed futures is a process. I am not asking you to make a dramatic shift if your business. Instead, open your mind to some new possibilities and offer managed accounts in addition to what you’re currently doing. I think you will find many of your current clients are also interested in a managed program. Or maybe there was that prospect that you couldn’t quite close who might be interested in being shown something different.
Once you have decided to offer CTA accounts to your clients, what is the best way to get started? I have found that many transactional brokers are intimidated by the managed futures world. There are some basic concepts that you will have to understand in order to talk intelligently about these programs. But just like with transactional business, you didn’t know everything from day one, right? With a small amount of study, you can be up to speed in offering CTA accounts to your clients in no time.
I am going to give a plug to my good friend Kim Avery with Autumn Gold. Kim’s Building Wealth with Managed Futures is an excellent primer on managed futures concepts. The book is in its second edition, and you can contact Kim directly at kim@autumngold.com to receive a copy. I cannot recommend her book highly enough. If you have ever thought about offering managed accounts to your clients, this book is a must read.
Once you have the basics under your belt, you will want to look at which CTA’s you would like to offer to clients. There are hundreds of CTA’s active at any one time with account minimums from $10,000 to over $10 million. Their strategies are equally as diverse. CTA selection can be overwhelming for brokers just getting started. My advice is to find a relatively small number of CTA’s with whom to work. Watching five or ten programs will be much more manageable than trying to track hundreds at a time. A broker getting started will find speaking with someone experienced in the field is an excellent resource for CTA selection.
Once you have a small list of potential CTA candidates, spend some time getting to know them better. CTA’s love to speak with brokers interested in raising money for their programs. What markets do they trade? What are the ideal and less than ideal conditions for their trading strategy? How do they attempt to make money? How do they attempt to mitigate risk? This should be a nice long conversation, and you should probably schedule a follow up call with them to go over anything you didn’t cover in the first phone call. If you are going to be selling this program to your clients, you should be as comfortable as possible with the trader and his program. Potential clients will pick up your genuine enthusiasm about a program when you are speaking with them.
Next you will want to review the CTA’s disclosure document (ddoc) and any promotional materials very carefully. The ddoc is the most in depth piece about the trader and their program. Read it carefully! Many documents contain similar language, but you want to make sure that you understand everything it contains. You don’t want to be caught off guard by a client asking you a question that you cannot answer.
The disclosure document is the primary promotional material for a CTA, but many produce nice performance reports or tear sheets as well. Returns listed on this reports are net of all fees and commissions. It is nearly impossible for a transactional broker to show similar reports to their clients compliantly. CTA’s must submit their returns to NFA quarterly, and they are part of a CTA’s NFA audit. Most often they are produced by independent third party accounting as well. Always remember that past performance is not necessarily indicative of future results when presenting these to clients.
Getting started in managed futures is a process. There is learning to be done, but there are many good resources out there. Make a commitment to spend a little time educating yourself. There are a myriad of new business opportunities that can come from offering managed accounts. Many believe the multi-year equity market rally is coming to a close. Clients may be more open than ever to diversify their portfolios into an asset class that can potentially capitalize on overall market volatility and both rising and falling markets. Stress upon them the need to diversify into non-correlated assets. Diversify before something happens in the market, not after. I believe your clients will be more open to this idea now than they have in a while.
Clearly I cannot cover all of the necessary topics of managed futures in one article. If you have any specific questions, feel free to contact me at mjohnson@highridgefutures.com.
Matt Johnson is the Vice President of Managed Futures for High Ridge Futures, LLC in Chicago, IL.
