What is a Commodity Trading Advisor?

For short, they are called CTA's. A Commodity Trading Advisor invests in the Commodity Futures Markets and tries to make a profit. Usually they are managing large dollars of capital and CTA's performance is tracked to show their quarterly profits and losses. Commodity Trading Advisors typically have Managed Funds or Pools that they trade for. Whereas the typical Commodity Broker will place order of 1 or 2 contracts at a time, a CTA may place a hundreds. Considering the dollars they manage, it will be curious to see what type of profits they show.

CTA's - Profits or Losses?

We did a little research with the help of Barclays Hedge. They track Commodity Trading Advisors' returns and compare to the S&P and the Long Bond Index. This is their criteria for their index:

The Barclay CTA Index is a leading industry benchmark of representative performance of commodity trading advisors. There are currently 602 programs included in the calculation of the Barclay CTA Index for the year 2012, which is unweighted and rebalanced at the beginning of each year.

To qualify for inclusion in the CTA Index, an advisor must have four years of prior performance history.

The results for the last 30 years show an average annual return of 11.58% but in more recent years have suffered. But when the going is good it can be quite impressive showing a compounded return of 10.76%!

How Commodity Trading Advisors Achieve Superior Returns

It is fairly simple, they take more risk by investing / trading commodities, futures and options. The key here is that they have "controlled" risk. They don't use the Vegas mentality and bet on long shots. Most Commodity Trading Advisors have a systematic or technical approach to trading. They have a trading plan and they stick to it. Part of this plan is controlling their losses. Typically, they risk a very small percentage of their equity on any trade or market - usually less than 2%. Very large CTA's may have a figure as a fraction of 1%. In a simplistic form CTA's have a proven trading plan that works...they stick to it...they control their risk...discipline and money management then become the key.

Compare this to the approach of the Newbie Commodity Trader. Mr. Newbie open an account because he thinks we will have a drought and soybeans will skyrocket. He either buys 10 out of the money options with his $10,000 or he goes long about 5 futures contracts. The typical result is the market will become more volatile during the spring or summer and the market will dip causing a margin call or his account is wiped-out. Maybe the market moves a little higher over a period of time. That would be good for his options-right? Maybe not. The time value of his options erodes daily, so in order for him to make a good profit he needs a fairly quick and sizeable move. Believe me, this happens every day in the markets by new and even experienced traders and probably always will.

So, the difference between the Commodity Trading Advisor and the typical new commodity trader is quite easy to see. CTA's are educated on the markets and take a disciplined trading approach. The Newbie usually "wings it" and does not have the patience to learn. I will say that most people are not successful traders on day one. It typically takes a few years of steady trading, mentoring and learning to become successful...if you can become successful.

There is plenty of money to be made in the Commodities Markets. I suggest that newer or unsuccessful traders study how Commodity Trading Advisors trade. There is plenty of information out there if you want to put the time in. Believe it or not, many of their trading strategies are not big hidden secrets. They use alot of techniques you can find in periodicals and trading books.

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