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© 2018 by eFloorTrade, LLC. 

  • Chris Moore

6 Tips for Choosing a Commodity Trading Advisor

A Commodity Trading Advisor's success often has a lot to do with the manager.

Choosing a CTA can be like riding the bus. For many, the investment selection process boils down to picking managers based on their performance potential, such as where they're heading and how fast you think they can get there. Seldom do investors take into account the merits of the person behind the wheel. And yet, the skill of the manger driving the bus can be of key importance. Here are eight tips to help you pick the best Commodity Trading Advisor for your portfolio.


Look for a manager with skin in the game.

Nothing will motivate a manager's performance more than his own bottom line. Another encouraging sign: Some managers also will invest their own money in the strategy. You'll find the manager's fee structure in the company's disclosure document. If you'd like to know whether the manager invests in their strategy, ask and we'll let you know.


Choose someone dedicated to the fund.

To identify good managers, we suggest relying on the three P's of manager selection. The first P is for people. It is important to identify an experienced team whose main focus is managing the strategy. Managers distracted by other responsibilities may not be giving the strategy the full attention it needs, potentially hindering performance.


Watch out for style drift.

The second P of manager selection is process, or the manager's investment strategy. You might consider a manager who has a disciplined and repeatable strategy. Style drift, when the strategy shifts from mean reversion to trend following, for example, is not a good sign. Style drift in managed futures accounts is generally easy to identify because investors receive daily statements that record the manager's trading activity each and every day.


Take performance with a grain of risk.

The third P is for performance. While past performance may matter, selecting a manager isn't always as simple as choosing the best performer. Investors should consider the level of risk a manager had to take to get the performance they achieved. Best-performing managers may have had to take outsized risk to reach the top spot, for example. Because you want a manager whose investing success doesn't require unnecessary or excessive risk-taking, an investor might compare the strategy's standard deviation, or the degree of volatility it has, to other managers.


Use the Sharpe Ratio to gauge the manager's skill.

A good measure of risk-adjusted return and the manager's skill is the Sharpe Ratio. It is a measure that indicates the average return minus the risk-free return divided by the standard deviation of return on an investment. A higher Sharpe Ratio suggests a strategy that has historically generated more consistent returns, something we suggest looking for. A smoother ride can lead to better long-term results.


Beware of CTAs who attract too many investors.

While this may sound counterintuitive, a strategy's assets under management can get too big. When an actively managed strategy has too many assets, it can become difficult to move a large amount of money in order to execute. Strategies with $10 billion in assets under management, for instance, may be too big for its own good. Before investing, ask how much money the strategy can handle and consider the size of the relative market(s) that it is being deployed across.

IMPORTANT RISK DISCLOSURE

Futures trading is complex and carries the risk of substantial losses. It is not suitable for all investors. The ability to withstand losses and to adhere to a particular trading program in spite of trading losses are material points which can adversely affect investor returns.

The returns for trading systems listed throughout this website are hypothetical in that they represent returns in a model account. The model account rises or falls by the average single contract profit and loss achieved by clients trading actual money pursuant to the listed system’s trading signals on the appropriate dates (client fills), or if no actual client profit or loss available – by the hypothetical single contract profit and loss of trades generated by the system’s trading signals on that day in real time (real-time) less slippage, or if no real time profit or loss available – by the hypothetical single contract profit and loss of trades generated by running the system logic backwards on backadjusted data (backadjusted).

Note that the Client Fill Trades are reported across all clients utilizing the platform, across multiple brokers, and are not based solely on the performance of accounts at this brokerage.

The hypothetical model account begins with the initial capital level listed, and is reset to that amount each month. The percentage returns reflect inclusion of commissions, fees, slippage, and the cost of the system. The monthly cost of the system is subtracted from the net profit/loss prior to calculating the percentage return.


If and when a trading system has an open trade, the returns are marked to market on a daily basis, using the backadjusted data available on the day the computer backtest was performed for backtested trades, and the closing price of the then front month contract for real time and client fill trades. For a trade which spans months, therefore, the gain or loss for the month ending with an open trade is the marked to market gain or loss (the month end price minus the entry price, and vice versa for short trades).


The actual percentage gains/losses experienced by investors will vary depending on many factors, including, but not limited to: starting account balances, market behavior, the duration and extent of investor’s participation (whether or not all signals are taken) in the specified system and money management techniques. Because of this, actual percentage gains/losses experienced by investors may be materially different than the percentage gains/losses as presented on this website.


Please read carefully the CFTC required disclaimer regarding hypothetical results below. HYPOTHETICAL PERFORMANCE RESULTS HAVE MANY INHERENT LIMITATIONS, SOME OF WHICH ARE DESCRIBED BELOW. NO REPRESENTATION IS BEING MADE THAT ANY ACCOUNT WILL OR IS LIKELY TO ACHIEVE PROFITS OR LOSSES SIMILAR TO THOSE SHOWN; IN FACT, THERE ARE FREQUENTLY SHARP DIFFERENCES BETWEEN HYPOTHETICAL PERFORMANCE RESULTS AND THE ACTUAL RESULTS SUBSEQUENTLY ACHIEVED BY ANY PARTICULAR TRADING PROGRAM. ONE OF THE LIMITATIONS OF HYPOTHETICAL PERFORMANCE RESULTS IS THAT THEY ARE GENERALLY PREPARED WITH THE BENEFIT OF HINDSIGHT. IN ADDITION, HYPOTHETICAL TRADING DOES NOT INVOLVE FINANCIAL RISK, AND NO HYPOTHETICAL TRADING RECORD CAN COMPLETELY ACCOUNT FOR THE IMPACT OF FINANCIAL RISK OF ACTUAL TRADING. FOR EXAMPLE, THE ABILITY TO WITHSTAND LOSSES OR TO ADHERE TO A PARTICULAR TRADING PROGRAM IN SPITE OF TRADING LOSSES ARE MATERIAL POINTS WHICH CAN ALSO ADVERSELY AFFECT ACTUAL TRADING RESULTS. THERE ARE NUMEROUS OTHER FACTORS RELATED TO THE MARKETS IN GENERAL OR TO THE IMPLEMENTATION OF ANY SPECIFIC TRADING PROGRAM WHICH CANNOT BE FULLY ACCOUNTED FOR IN THE PREPARATION OF HYPOTHETICAL PERFORMANCE RESULTS AND ALL WHICH CAN ADVERSELY AFFECT ACTUAL TRADING RESULTS.


The information contained in the reports within this site is provided with the objective of “standardizing” trading systems account performance and is intended for informational purposes only. It should not be viewed as a solicitation for the referenced system or vendor. While the information and statistics within this website are believed to be complete and accurate, we cannot guarantee their completeness or accuracy. As past performance does not guarantee future results, these results may have no bearing on, and may not be indicative of, any individual returns realized through participation in this or any other investment.


The statistics on this page are calculated via the combination of three hypothetical data sets:

1. Backtested, 2. Tracked, and where available 3. Live.


Backtested performance is calculated by running a trading system backwards in time, and seeing what trades would have been done in the past when applied to backadjusted data. Tracked performance is calculated by running the trading system forwards on data each and every day, and logging the trades as they happen in real time day after day. Live performance is calculated by running the trading system on live tick data for actual clients and tracking the actual buy and sell prices those clients trading the system receive in their account.


We use Live results to calculate monthly returns for any month in which clients were trading for the entire month, Tracked fills for those months in which there are no client fills for the entire month, and computer generated fills for those months occurring before we loaded the system onto our trade servers. The results are hypothetical in that they represent returns in a model account. The model account rises or falls by the single contract profit and loss achieved by the system in whichever data set is available. The hypothetical model account begins with the Suggested Capital listed, and is reset to that amount each month. The percentage returns reflect inclusion of commissions, fees, slippage, and the cost of the system. The commission, slippage, fees, and monthly system costs are subtracted from the net profit/loss prior to calculating the percentage return.


Please note that the method of resetting the model account to the initial value at the start of each month creates a track record which is representative of the simple returns for each time period, but that it does not, by definition, show how returns would compound over time. Should an investor following said program trade a single contract indefinitely without also resetting their account to the initial capital amount each month, their performance will differ from the performance detailed herein.


eFloorTrade has no opinion whether an investment will provide similar performance in the future.