Evaluating Risk from an Investor’s Perspective
Investors should understand that there are risks associated with trading futures and options on futures. The Commodity Futures Trading Commission (CFTC) requires that prospective customers be provided with risk-disclosure statements, which should be carefully reviewed as past performance is not necessarily an indicator of future results.
Potential investors will want to become familiar with industry definitions for evaluating the risk-return element of managed futures performance. The following equations, with some variations, are often used:
Managed Futures Fee Structures
Total management fees in the managed futures industry tend to be higher than those in the equities market. These fees, however, may be partially offset by the lower commission costs for comparable dollar transactions in the futures industry. While management fees do vary by the type of managed futures account and may be negotiable, there is a general fee structure. Investors should understand that performance information for a managed futures account or fund is almost always expressed net of all such fees.
Typically, the trading advisor or trading manager is compensated by receiving a flat management fee based on assets under management in addition to a performance “incentive” fee based on profits in the account. The performance fee is almost always calculated net of all costs to the account, such as management fees and commissions. The performance fee is thus based on net trading profits, which are usually paid only if the account or fund exceeds previously established net asset values.
A few trading managers assume the “netting risk,” whereby the performance results of all trading advisors in the account are netted before the investor is charged a performance fee. The trading manager assumes the netting risk by paying each CTA according to his or her individual performance.
In addition to management and performance fees, an account or fund pays transaction costs or brokerage commissions. These expenses reflect the cost of executing and clearing futures and generally are calculated on a per-round-turn basis.