What´s a CTA?

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. Membership in the National Futures Association and registration with Commodity Futures Trading Commission (CFTC) is required unless You have provided advice to 15 or fewer persons during the past 12 months and do not generally hold yourself out to the public as a CTA or You are in one of a number of businesses or professions listed in the Commodity Exchange Act or are registered in another capacity and your advice is solely incidental to your principal business or profession.

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How are Managed Futures used in an investment portfolio?

With prudent allocation, Managed Futures may help reduce the overall risk of a portfolio. A prudent investor should ensure that at least a portion of their portfolio is allocated to an alternative asset class 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 may be used to diversify investments over different asset classes, resulting in less volatility and less risk. The other attractive feature of the IBTRADE Managed Futures product is that there are no lock–up of funds or penalties for early withdrawals.

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Who regulates Commodity Trading Advisors?

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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How much money should I invest in Managed Futures and how do I open an account?

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 CTA management agreement and PFGBEST Customer Agreements and account opening forms.

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Are Managed Futures suitable for all investors?

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 drawdowns 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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What is the minimum investment needed to establish an account?

Each CTA has their own minimum account size and that can vary from as low as $25,000 to multiple millions. Generally speaking the newer CTA´s have lower minimum entry requirements as they are still in asset building stage whereas older, more established CTA´s tend to have higher minimum account requirements.

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How does an investor interpret a track record in judging the performance of a CTA?

Investors should take particular note of the Trading Advisors 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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What is a front end load fee?

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 must get the investor to read and sign a break even analysis

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What is Notional Funding?

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 (FCM). The difference between the nominal value and the cash actually deposited is called notional funding.

To illustrate, assume a commodity trading advisor (CTA) 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. Assume 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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What is Compound Annual Return?

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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What is Monthly Standard Deviation?

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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What is the Downside Deviation?

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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What is the Downside Deviation?

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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What is Average Recovery Time?

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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Absolute return

An outright return achieved irrespective of overall market direction. Whereas traditional investments typically measure their success in terms of whether they track or outperform a key market benchmark or index (relative returns), hedge funds, CTAs and alternative investment strategies aim to achieve outright positive returns irrespective of whether asset prices or key market indices rise or fall (i.e. absolute returns rather than relative returns).

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