CTAs – Strategy for uncertain times

A commodity trading advisor (CTA) is a registered/certified person or firm specialising in professional commodity investment management, a financial industry niche that has been in existence for over 30 years. The moniker is somewhat misleading, given that the related strategy (also known as managed futures) invests not just in traditional commodities, but also in currencies, equities and interest rates. CTAs use futures contracts[1] in connection with their quest to identify and capitalise on specific market trends, the direction of which is irrelevant. In other words, positions can be established “long” (to benefit from rising prices) as well as “short” (in the event of falling prices).

Most of the strategies applied by CTAs are systematic and driven by computer-based trading programmes that rely exclusively on quantitative signals. However, there are also discretionary strategies where the manager is free to decide which positions/directions to take. Risk management is another feature CTAs integrate into their trading models. This is especially important since futures trading involves tremendous financial leverage (margin).

Forward contracts (futures) have been in use for commercial trade of one kind or another since the 17th century. Through the ages they have enabled producers (e.g. farmers) to hedge against adverse price fluctuations. Meanwhile, the futures markets have expanded to cover all sorts of underlying asset, physical as well as financial. And in this regard it is important to note that, unlike traditional hedge funds, CTAs are strictly supervised. These managers need to register with the US National Futures Association (NFA) and are also supervised by the Commodity Futures Trading Commission (CTFC). Another factor that differentiates CTAs from hedge funds is the market liquidity of the instruments they utilise. CTAs invest in futures contracts (e.g. stock indices, interest rate contracts) as well as OTC currency contracts, all of which are highly liquid. And yet another important distinguishing feature: each counterparty’s futures position is “marked to market” on a daily basis, meaning that any profits or losses on the open position are settled in cash with the exchange at the end of each trading day. This prevents the risk of default of the counterparty.

[1] Futures = In Futures contracts the seller undertakes to deliver the agreed quantity of an underlying asset at a specified price and at a specified time and quality at a specified location. At the same time, the buyer undertakes to accept these.

For more information, please contact your client advisor.