The world of investments doesn’t end with equities, fixed income, and cash which are covered in detail by the financial media each day. Additional opportunities exist within the investment stratosphere such as commodities, art, cryptocurrency, wine, real estate and precious metals, to name a few. These alternative investments allow for those who are qualified to diversify across multiple asset classes, which helps to hedge an overall portfolio against drawdowns as well as volatility.
At our investment advisory practice, JSPM LLC, we offer qualified clients** the option of managed futures as an alternative investment strategy. We are dually registered as an RIA (Registered Investment Advisor) and a CTA (Commodity Trading Advisor) which is defined as the following:
“A commodity trading advisor (CTA) is an individual or organization that, for compensation or profit, advises others, directly or indirectly, as to the value of or the advisability of buying or selling futures contracts, options on futures, retail off-exchange forex contracts or swaps. Indirect advice includes exercising trading authority over a customer’s account or giving advice through written publications or other media.”
CTA’s are registered with the NFA (National Futures Association) and regulated by the CFTC (Commodity Futures Trading Commission). This is a separate regulatory organization from the SEC (Securities Exchange Commission) which regulates securities markets.
An important point to mention is that an individual has to be qualified in order to participate in managed futures strategies. Much like one has to be an accredited investor in order to invest with a hedge fund, a client must meet certain guidelines to participate in a CTA strategy. The definition of those who do (QEP) Qualified Eligible Participant are below:
- A qualified eligible participant is an individual who meets the requirements to trade in different investment funds, such as futures and hedge funds.
- A QEP must own at least $2,000,000 of securities and other investments, have an open account with a FCM for at least six months, and have a portfolio that has at least $200,000 of initial margin and option premiums for commodity interest transactions.
- QEPs are similar to, but not the same as, accredited investors in that they are assumed to have a sophisticated understanding of the complexities of trading risky assets such as futures and hedge funds.
In short, you have to have the means to be able to withstand drawdowns that can be associated with strategies involving leveraged instruments like futures and options.
I spent years working with retail clients who tried their hand at futures trading for themselves. Approximately 95% of them failed. Trading futures is a difficult task for anyone, but to the underfunded retail trader, the deck is stacked high against you. If you have the means, it is highly recommended that you have a professional with years of experience trade futures on your behalf.
Yesterday my partner posted our recent managed futures performance which is reported to the NFA:
You can see that the monthly returns can dwarf what is possible with equities. This can also go the other way. As I mentioned, trading futures is risky and most definitely not suitable for all investors. There are good reasons this is available only to qualified investors. However, if you qualify and have a trained professional overseeing your account, the possibility for excess returns exist.
In sum, if you are interested in alternative investments via our managed futures strategies, feel free to reach out to us. Our new website is live here. It is still being upgraded so if you see a notice to check back soon feel free to email me at firstname.lastname@example.org and Ryan will be in touch soon.
Enjoy the day.
Trent J. Smalley, CMT