PA Commodity Trading Advisor (CTA) is a person or entity that advises clients regarding buying and selling futures contracts, futures options, or certain forex contracts. Although some CTAs provide only advice and commodity-market insight to clients, most commodity trading advisors exercise direct trading authority over client funds, and manage client accounts according to specific commodity-related strategies. Commodity futures contracts are exchange-traded long-short counterpart contracts which oblige the long holder to buy (or take delivery of) the underlying physical (bulk) commodity, while the “short” agrees to make delivery of the underlying commodity. In practice, most exchange-traded futures contracts are settled without physical delivery-- that is, the contract-holding counterparts are investors rather than producers or end-users of the physical commodities themselves. Futures and options on futures offer investors many opportunities to profit from the price movements of consumable commodities in worldwide markets. The CTA designation refers to a financial advisor who specializes in commodity futures investment. A person or firm that offers advice to individual clients about futures trading must be registered as a Commodity Trading Advisor. Since the 1970s, when commodity investments first came within reach of many retail investors, the U.S. Government's Commodity Futures Trading Commission (CFTC) has gradually strengthened the requirements for registration. The CTA registration process has helped investors by standardizing the “commodity broker” profession through mandatory broker education, testing, oversight and accountability. Typically, registration is mandatory for principals of the firm and all staff members who provide advice to or accept orders from the public. In order to obtain this registration, the applicant must meet certain proficiency requirements, usually by passing the Series 3 examination, or sometimes by other tests depending upon the applicant's exact role in the firm. The futures industry operates under the watchful eyes of both the Government and the National Futures Association (NFA), which is the financial industry's self-regulatory group responsible for monitoring U.S. futures marketplaces and safeguarding investors.
The CTA's specialized experience and advice are invaluable for retail and institutional investors engaged in commodity trading, hedging and speculation, since all such investments involve substantial leverage that requires careful management in order to maximize potential gains while minimizing potential losses. Leading commodity trading advisors know their marketplaces well, and they can help individuals and institutions alike to diversify broadly and potentially achieve marketing-beating gains, especially when stock and debt markets are uncertain. A good commodity trading advisor helps investors diversify.
CTAs are usually compensated with a management fee calculated based on the amount of money under management and a profit incentive fee linked to trading profits. As with hedge funds, CTAs generally do not charge an incentive fee unless a given high-water mark or hurdle rate is achieved. Commodity trading advisors manage client funds either separately or in pools, and all investment strategies are focused on utilizing futures contracts, options on futures and similar instruments to hedge and speculate on a wide range of physical commodities including metals, petroleum and energy products, grains and agricultural products, as well as derivative contracts regarding indices, currencies and bonds. The investment and trading strategies used by CTAs may be categorized according to overall market strategy (market-neutral or trend-following) and business segment (agricultural, financial, energy etc.). In commodity markets, trading styles may be categorized as either technical (chart-based) or fundamental (based on an assessment of supply and demand). Technical-style traders make their futures-trading decisions based on the chart patterns of price, volume and other indicators for a given commodity, while commodity funds focused on fundamentals tend to buy and sell based on market news, crop reports, production and consumption statistics, and other public and private information about supply and demand.
A CTA's management type may also be classified according to the length of holding time for the fund's positions, and also according to the length of trend upon which trading decisions are based. So, for example, commodity-fund managers that trade on a term or trend of less than 10 days are said to be short-term strategists, while medium-term is 3 to 6 months, and anything beyond 6 months is considered long-term investing.
These are important distinctions to make, since the results from each type of management strategy may differ according to market volatility and other conditions. In particular, the high leverage which makes futures contracts an attractive investment also means that during times of high volatility in a trendless market, investors may be “shaken out” of their holdings due to margin requirements. Still, futures are an important component of any balanced portfolio, since they offer an opportunity for stellar returns, especially when commodity prices are trending up or down, or during times when prices of stocks and bonds are volatile or trending downward. Many investors allocate up to 10% of their portfolios to commodity futures investments, usually managed by an experienced CTA. Futures investments may thrive during periods when equity and debt investments under-perform. Commodity futures and related investments are considered non-correlated with equity markets, which means their prices move independently. So, investors with stock-heavy portfolios often benefit from diversification including investments in commodity futures managed by a leading commodity trading advisor. To learn more about portfolio diversification and the best Commodity Trading Advisors, please contact us today.