Many investors, when and if they think of managed futures, may think that those are the quantitative funds that follow trends. While most managed futures (CTAs) are systematic traders, the asset class is not homogenous. As of year-end 2014, systematic traders tallied approximately $296 billion in assets in BarclayHedge’s sample; discretionary traders totaled a bit more than $18 billion.
By Barclay Hedge’s database, assets under management for the managed futures industry were $316.8 billion as of December 31, 2014.
It’s your job as the investment manager, when you communicate your value to potential investors, to be absolutely clear how you manage money. This includes communications on your website, pitch book, fact sheets, case studies, blogs, and other inbound marketing content.
1. Are You A Systematic Or Discretionary Trader?
What may appear clear to you as an investment manager may be clear as mud to your prospective institutional and high net worth clients. “Systematic traders use quantitative models to analyze trends and generate buy and sell signals, according to Arthur P. Bartholomew, III, a 30-year veteran manager of CTAs. “Discretionary traders analyze fundamentals and underlying economic factors, and they often specialize in particular sectors or markets.”
2. What Sectors Do You Trade?
Do you trade financial assets, like equity indices, interest rates, and currencies? Domestic or international? Or do you trade physical sectors, like energy, metals, and agricultural commodities?
3. What’s Your Trading Style?
“Pure trend-following models focus almost exclusively on the current price relative to some specified measure of historical prices, such as a moving average,” according to Equinox Funds. “This trading style is mainly reactive, as no effort is made to forecast future prices or trends.”
Are you a pattern trader who analyzes market trends – beginnings, middles, and ends – in stuff other than prices? Then you are not a pure trend-following strategy, which looks only at price patterns. Your prospects should know the difference, and you should tell them.
If you are a mean-reversion contrarian, it’s ok to say so. It does not mean you are mean. But your prospective investors may want to know that you look to identify when a current trading trend may reverse, and seek to profit from reversals.
According to the Commodity Mercantile Exchange (CME), “Spread trading is a relative value type of trading that uses both short and long positions to reduce the risks of holding only one type of position. Strategies include calendar spreads (for example, long March soybeans and short June soybeans) or inter-commodity spreads, such as the crack spread (long crude oil and short petroleum products) or the crush spread (long soybeans and short soybean oil or soybean meal).”
Or are you an option trader who trades exchange-listed and/or over-the- counter options, on futures contracts? If so, your investors will mostly likely want to know how you seek to exploit the volatility in underlying markets.
4. Is Your Time Horizon Short-Term or Long-Term?
“Systematic CTA programs use different time horizons to determine the existence of trends and to generate buy and sell signals,” said Mr. Bartholomew. “Time frames used can vary widely, from as short as intra-day to as long as six months or a year. Individual CTAs may choose to focus on one part of this spectrum, or may use multiple time frames.”
5. What Risk Disclosures Should You Include In Communications?
In general, whatever can impact the price movement of your fund should be disclosed. Price changes can be impacted by interest rates; U.S. and international political and economic events U.S. and international rates of inflation and deflation; U.S and international fiscal and monetary policy; currency devaluations and revaluations; supply and demand relationships; natural disasters; weather; and maybe even pure luck.
And as with all investments, your marketing should include a risk disclosure statement. Typical language includes the idea that the purchase of a managed futures investment may: involve a high degree of risk; be speculative, illiquid; complex, not transparent in pricing, are not subject to the same regulatory requirements as mutual funds, and often charge high fees.