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CTAS: Beyond Performance
By Jon Sundt

In today's search for CTA's, most investors are provided with a barrage of numbers relating to the advisors track record. Returns, drawdowns, standard deviation ,ratios, winners vs. losers, etc. These are important statistics to analyze and should be the foundation of what to look at when searching for a money manager. The net returns to the investor over the last 4 years is an important number and most investors base their decision to invest with a CTA primarily on these numbers. While this has worked well for many investors, these performance benchmarks only tell part of the story . Many investors give money to a CTA with a great history only to learn the true meaning of the fine print: Past performance is not necessarily indicative of future results. We have seen many promising CTA's with tremendous numbers of performance go downhill . One of the greatest challenges to investors looking for a CTA is to look beyond the performance numbers for clues to who will continue to do well, and who wont. Few investors look beyond performance and we feel that is a mistake. The following are a few of the areas that need close attention.

Money Under Management

We believe good performance with large amounts under management are a positive sign. On the other hand, many investors would like to get in on "the ground floor" with a CTA while his account minimums are low. The industry has many top notch well known CTA's whose returns in the early part of their careers were spectacular. This has prompted investors to go after CTA's with great track records with very little money under management. The important facts to consider are how the increase in funds under management have affected returns and the reporting of those returns. For example: What if a CTA makes 100 percent return last year with 200k under management but a -10% return this year with 2 million under management ? His average return over two years shows a gain but he actually lost more money than he gained. Did the increase in funds affect the performance?

Trading Style and Markets

As CTA's accept more money under management, it is important to look at the style of trading and how this new money might affect its outcome. Many of today's top CTA's manage hundreds of millions successfully while others have put a cap on new money and manage much less. This can be a function of the markets they trade and the frequency of trading. Bond futures have more liquidity gold futures. A long term position trader might be less concerned than short term day trader. These differences should be examined as assets increase.

Discretionary vs. Systematic Traders

If you follow orders from a system, in theory the money under management should not change the signal from the system. What if a CTA overrides his system now and then? Now he becomes discretionary. This discretion can be affected by the amount under management. It is important to know how much discretion a CTA uses, and how he handles the "pressure". Some of the best traders we follow use lots of discretion and manage hundreds of millions, while others are purely systematic.

Office Management

A CTA's office environment can be a clue to the discipline and organization of the money manager. Many CTA's are super traders but run a lousy office. This can spill over onto the performance if the CTA isn't focused on making money for his clients. If a CTA talks to 30 clients, five brokers, types his own letters and answers his own phone, he better have a very systematic trading system which requires little maintenance day to day.

In summary, we believe picking a good money manger involves many factors beyond the performance numbers. Investors who would like to know more about our services can call us at 1-800-828-5225.

Jon Sundt is the director of managed accounts at Jack Carl 312 Futures, one of the largest discount brokerage firms, and is based in La Jolla, Calif. His division tracks hundreds of CTAs, many of whom trade through his firm, and he has placed millions of dollars with some of the nation's best-known CTAs and money managers.

 

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