What's the minimum investment for Managed Futures
We are often asked by prospective investors what the proper minimum investment is to get started. With so much information available, investors have the ability to log into databases and see varying minimums for each CTA, and a range of different margin-to-equity ratios. Often, this creates confusion on how much they really need to begin investing in managed futures strategies. Obviously, how much a person should invest versus how much they need to get started are two completely different questions. What someone should invest is based on the size of one's overall portfolio, but in this post, we will be discussing what we believe an investor needs to test the waters with managed futures.
Different managed futures firms will likely have different answers to the minimum investment question. The wide range of answers are the result of the firm's investment philosophy, recommended CTAs, and target clientele. At eFloorTrade, LLC ("eFloorTrade"), we strongly believe that regardless of the investment philosophy, and recommended programs, no investor should invest in managed futures/CTAs unless they have at least $100,000 to invest. The reason for this is very simple: diversification.
To increase the probability of having long-term managed futures success, we believe investors should be diversified among different strategies. The investment team at eFloorTrade believes that $100,000 initial investment (minimum) is required. Since each investor's portfolio is different (primarily because every investor has different investment goals), no two portfolios are usually alike. Regardless, a $100,000 provides an investor enough flexibility to diversify among different strategies. So, what does $100,000 get you?
A typical $100,000 portfolio can utilize as many as four different CTAs. The number of CTAs included has largely to do with the investor's investment goals. This way we can include three to four CTAs in a portfolio is by controlling the portfolio's margin usage. Margin usage is the total amount of dollars used by all the CTAs in the portfolio on a day-to-day basis to conduct investment activity. In some cases, we assist clients in constructing portfolios where the average margin usage for the entire portfolio will be between 20% to 30%.
What does an investor do if they are just shy of $100,000 in available funds? He/she can still participate, but they will be taking on more risk (on a percentage basis) doing so. For example, if we were building a portfolio of three CTAs for a $100,000 investment that had an average margin usage of 30% (or $30,000), it is likely that an investor with only $75,000 can invest in the same portfolio. However, they would be taking additional risk to do so: assume that the portfolio has a loss of $10,000, if an investor had invested $100,000, that loss would amount to 10%, but if an investor only invests $75,000, then the loss equals 13.33%. Again, the dollar loss is still the same, $10,000, but when evaluated on a percentage basis, the risk increases with the smaller investment amount of $75,000.
Through years of investment experience, eFloorTrade has determined that $100,000 is sufficient capital to gain exposure to managed futures, while also achieving diversification within the asset class. Regardless, every investors situation is unique, therefore, we suggest that you speak with us and let us assist you in determining if managed futures investments are appropriate for you.
Disclaimer: Past performance is not indicative of future results. Futures trading involves substantial risk of loss and may not be suitable for everyone. By no means is this newsletter/blog post offering any investment advice or suggesting to make any trade recommendations. Please consult an eFloorTrade, LLC ("eFloorTrade") advisor prior to opening any managed futures accounts.
All opinions expressed constitute those of eFloorTrade as of August 2019 and are provided for informational purposes only. There is no guarantee that any historical trend illustrated above will be repeated in the future, and there is no way to predict precisely when such a trend might begin. The information is based on the economic and market conditions as of this date. The information is not intended as a discussion of the merits of a particular offering and should not assume that any discussion or information provided herein serves as the receipt of, or as a substitute for personalized investment advice from eFloorTrade or any other investment professional.
This material is provided for informational purposes only and does not constitute a solicitation. The material is not intended to be relied upon as a forecast, research or investment advice and is not a recommendation, offer or solicitation to buy or sell any securities or to adopt any investment strategy. There is no guarantee that any forecasts made with come to pass.