Growth Of CTAs Presents Opportunities

Apr 22 2009 | 1:02pm ET

By Emanuel Balarie -- After stealing the show in 2008 with a combined return of 13.4%, the managed futures sector posted a down quarter to start 2009. Through March, the Barclay CTA index was down 1.46%. While the decline in this sector was broad based, trend followers had an especially difficult time trading the choppy markets. But even with a declining sector, there were some CTAs that were able to post positive numbers for the first quarter.

Growing Interest in Managed Futures

In last quarter’s edition, I boldly stated that “2008 will be known as a break out year for managed futures”.  After a down quarter, do I still believe this to be the case? I do.  In fact, my assertions was not necessarily based on the positive returns of 2008, but rather on the non-correlated returns and other unique attributes that the asset class brings to investors.  This was reaffirmed by the continued interests we are seeing from “new to managed futures” investors.

One way that we gauge this is by looking at the keyword searches that have recently come to our site. Over the past few months, we have seen an increase of searches that imply that investors are looking for additional knowledge on this asset class.  We have also received requests from several investment advisors and brokers who are conducting research on behalf of their client base. The consensus opinion is that they are looking for investment products that can generate returns in all types of market conditions and that are non-correlated with their equity investments.

Implications of Increased Interest

But what are the implications of this increased interest?

 For those in the industry, it is quite simple.  It means that the assets under management will likely continue to grow at an exponential pace. For those in sales, it means that they will now have a much easier time selling the asset class. For CTAs, it means that there are now more people that will be willing to allocate to this sector, and hopefully their specific programs.

There will also likely be an increase in the number of Commodity Trading Advisors.  One of the services that Balarie Capital Management offers is that we work with start-up or emerging CTAs. Over the past few months, we have seen an increased interest in our start-up CTA services. The traders that we have spoken with have a wide variety of backgrounds. Some are non-professional traders who have a dream of becoming a CTA and others are professional traders, with a great pedigree, that are looking to finally start their own shop.

The addition for these new CTAs can be both positive and negative for the industry. It is positive because it brings onboard a new round of talented managers.  It is also positive for the investors because they have a greater choice for investments.  However, one negative aspect will be that there will be a slew of traders who are professional by designation, but lack experience in terms of trading and risk management. Indeed, emerging CTA after emerging CTA has shown that posting numbers out of the gate is one thing…and maintain those numbers is totally different.  Investors should be cautious about allocating funds with an inexperienced trader who has a few months of stellar performance.

Opportunities for Emerging Traders

Institutional investors and seed capital funds are eagerly looking for talented traders to seed.  Specifically, we have noticed that there is a need for discretionary traders who specialize in a specific market or sector.  If you are a start-up or emerging CTA and are interested in the services that we offer, please contact us for a free consultation.

Where Have All The Investors Gone?

While my above assertions paint a bullish case for this industry, the net outflows out of this industry might confuse some individuals in thinking that quite the opposite is happening. However, I believe that the recent outflows are temporary and simply a reaction to the global liquidity mess, stock market decline, and real-estate collapse.  In other words, investors were not necessarily taking out their money because they were not satisfied with this sector; rather, they were taking out their money because they had to compensate for their other losses.

Investors have also suffered from an investment shell-shock of sorts.  It seems that all aspects of their wealth have diminished. From massive declines in the real-estate market, to their stock portfolios getting hammered, to hedge fund blow-ups and ponzi schemes…it is no wonder that investors are taking a moment to catch a breather when it comes to reallocating capital. But this action, in my opinion, is temporary.  We believe that investors will be looking for places to invest.  In fact, we are already noticing that institutional investors are actively looking to allocate.


In this quarter’s newsletter, we have included Fund of Funds Risk Management, a report published by Risk-AI, LLC. The report looks at the necessary steps to establish effective risk management, especially one it comes to quantitative due diligence and constructing a fund of funds or multi-manager portfolio. As we stated in last quarter’s commentary, we feel that the proper way to participate in this managed futures sector is to have a diversified portfolio with allocation to a variety of managers. The key, however, is finding the right managers and constructing the right portfolio.

There has also been a focus on risk due to the amount of hedge fund blow-ups and ponzi schemes that have been uncovered over the past several months. There will be a few trends that will likely result. First, we believe that there will that there will be a trend towards hiring independent risk consultants to manage portfolios. In addition to the independent qualitative and quantitative due diligence that these consultants might offer, investors seem to be inclined to pay “extra” for another set of eyes that continually monitor their portfolios.

Another trend that we are seeing is that there seems to be a renewed interest into opening up managed accounts. While institutional investors have previously shied away from this format- preferring fund structures- we are now seeing requests for managed accounts. At the core of this transition, is that investors want to be able to see their accounts and verify the trading activity that is occurring in those accounts. In short, they want transparency. While not all CTAs will comply with this request, we do feel that some will have to re-evaluate their business models and lower their managed account minimums if they are looking to attract additional capital.

Services for Investors and Commodity Trading Advisors

Balarie Capital Management and ADM Investor Services offer services for investors and CTAs. If you are an investor that wants to learn more about investing in managed futures or would like a free consultation on your current CTA portfolio, please contact us. If you are a CTA who would like to learn more about working with Balarie Capital Management please contact us.

Emanuel Balarie is a managing director at Balarie Capital Management. The firm works with high-net-worth investors, family offices, pensions, and endowment funds interested in adding managed futures to their investment portfolios. In addition, Balarie Capital Management offers clearing and execution services for CTAs, fund of funds and professional traders. Balarie is also the publisher of the online industry resource Commodity News Center and Managed Futures Quarterly.


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