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You might be wondering whata CTA is. A CTA is a Portfolio Managerfor derivative products such as foreign exchange, commodities or futures. If you're familiar with traditional mutual funds or hedge funds,you'll know the investment decisions are made by a specialist in stocks orbonds. These are also called equity andfixed income products.
An equity fund is managed byan equity Portfolio Manager known as a CFA and a bond fund is managed by afixed income Portfolio Manager also a CFA. Their exists a third type of Portfolio Manager and that is oneresponsible for managing a fund which is invested in products like currency,carbon emissions, precious metals, agriculture products and others. These Portfolio Managers are known as CTAsand they manage CTA funds sometimes known as a Managed Futures Fund.
Despite the obvious, eachinvestment style has its own unique characteristics. For example, a traditional equity investor only makes money whenthe stock market is rising. They lose money during a falling or bearmarket. Wouldn't it be fantastic to winno matter which direction the market went. Well that is exactly what happens in a CTA fund. The CTA can buy or sell at random. We call this being "long" or"short". When long, you'rebetting the market is going up and when short, you're betting the market isfalling. A CTA makes money no matterwhich direction prices are headed.
Now that you know thebasics, lets look at why CTA funds have out performed equity and bondfunds. Since September 2008 the wallstreet induced sub-prime mortgage fiasco has caused stock prices toplummet. If you held an equity mutualfund or a stock portfolio of your own, you will have lost money. In fact since Sept 1, 2008 the Dow JonesIndustrial Average has lost 20.36 percent. According to the Managed Futures CTAdatabase, the average CTA Fund YTD ROR (Rate of Return) to June 2009 is +2.14percent. That's a whopping differenceof 22.50 percent. These funds aredefinitely worth looking at.
A major advantage is theability to trade the underlying commodity product. Why buy a company that's involved in oil extraction when you canbuy the oil itself. The reason whystock market investing becomes difficult, is the many different factors thatcome into play. There is the ability ofmanagement, economic pressure, competitive pressure, union demands, changingconsumer habits and a host of other factors that determine the profitability ofa company.
A CTA fund has none of theseissues to contend with. Investors whopurchase Aluminum or High Grade Copper on the New York Mercantile Exchange areaffected only by issues of Supply And Demand. During economic periods of growth, prices rise and during periods ofrecession, prices fall. So while yourequity fund is sitting on the sidelines waiting for a market re-bound, the CTAfund is profitably trading a falling market.
I would be remiss if I didnot discuss the use of leverage. Unlikean equity fund, A CTA fund uses leverage. For example, to purchase $100,000 Canadian Dollars cost only $350 to theCTA. So when the dollar rises from 91 cents to 92 cents, the fund makes aprofit of US$1,000. That equates to a186 percent profit. If we look at thisfrom another angle it might become clear. To purchase 1,000 barrels of crude oil at US$60 per barrel would costUS$60,000 to the cash consumer. TheNYMEX charges a deposit, we call this margin, of US$6,000. Should Crude Oil rise to $65 dollars, theprofit is $5,000 or 83 percent profit.
Of course, the use ofleverage can be dangerous as losses can quickly escalate. Should Crude Oil have fallen to $55 insteadof rising, a loss of $5,000 would have resulted. Of course, CTA funds are not the only funds to utilizeleverage. Many equity hedge funds useleverage routinely and depending on your overall investment objective abalanced asset mix will dictate the percentage of your portfolio allocated tosuch a fund.
There are many typesof to selectfrom. Agriculture funds, energyfunds, foreign exchange funds, indexfunds, fixed income funds and greenhouse gas or global warming funds. Choose the one that's right for you, butwhen balancing your investment portfolio don't over look this important sector for proper andcomplete asset allocation.
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