Managed Futures

I not too long ago scanned a Commodity Trading Advisor data base to look at minimum account sizes for managed futures accounts. I observed minimum account sizes ranging from $25,000 to $5,000,000. I also noticed the typical CTA trading a small minimum account size has concentrated portfolios, high-margin demands, little money under management, a short track record, high volatility, just traded options or was presenting a pooled investment. Diversified trend followers providing individually managed accounts seemed to have minimums that were usually at least $1 Million.

Small managed futures accounts in the futures markets (less than $250,000) encounter significant difficulties not experienced by large accounts. Considering that most commodity futures contracts have face values in the tens or hundreds of thousands of dollars, it is easy to surmise that these contracts are for large accounts. But, low-margin demands have long enticed smaller investors and are the proverbial "rope to hang oneself with".

Let's analyze why large managed futures accounts may have it easier than small accounts. First, large managed futures accounts can afford to trade almost any market at any time. There are over 100 tradable futures markets globally, and should buy or sell prospects concurrently exist in any or all of them, a large managed futures account can easily afford the margin and exposure. It is stated that when it comes to investing that "diversification is the only free lunch" and large managed futures accounts can afford to diversify with impunity. This is in stark contrast to the small managed futures account where prudence dictates only having risk and exposure in a few markets simultaneously.

A large managed futures account is not constrained from trading contracts whose volatility is fairly high. For example, a London copper trade with a stop loss $14,000 away represents a risk of 1.4% in a million dollar managed account, but in a $100,000 managed account, this same trade would represent a risk of a whopping 14%! Any smart trader would steer clear of that trade in such a small account; however, having to bypass these opportunities is yet an additional penalty paid by the small managed futures account.

What's more, the large managed futures account can use one of the simplest forms of risk control available, contract scaling. For example, let's assume a large account is long 50 gold contracts while in a large bull market run and wants to reduce his open trade profit exposure. He can merely scale off as many contracts as he wants to lock in profit, whilst retaining his profitable position, but what can the small managed futures account do for scaling out if he only has on one contract in the first place!? Once again, the small managed futures account does not benefit from the versatility to control risk in the same fashion as the large managed futures account.

Now, for all the negativity I've just discussed above I think the smaller account has advantages over large ones. Small accounts are in a position to trade markets that would be far too illiquid for large accounts. Most institutional size funds are nearly limited to the trading of financial and energy instruments. They end up losing out on trading opportunities in the traditional physical commodity markets. Specifically commodities like Grains, Foods, and Fibers and the like. This creates a lack of diversification and an over reliance on those few sectors. The odd thing is that many small accounts end up with the same problem because they have chosen to deal with their small account dilemma by only trading a few (or one) market! They end up missing out on the sharpest edge they have on the "big boys".

It is for those smaller traders who want the advantages of true global diversification, with an individually managed (not pooled) account, that we formed Hoffman Asset Management. HAMI is chiseling out a unique niche by featuring a managed account program that screens and trades over 70 diversified commodity markets, while trading accounts as small as $30,000. The program's design tries keeping draw downs and volatility in line with what might be available in a large widely diversified account. This mixture of trading many markets inside of a small account while keeping volatility in line is truly unique. It fills what we feel is a huge gap in traditional managed account choices.

What we do is proprietary; however, the fundamental premise utilizes a kind of relativity. HAMI screens a large universe of tradable commodities for opportunities, yet, is highly selective in those trades that it will take. For approximately every 10 trading opportunities identified by HAMI's blend of trading systems, it takes only 1. HAMI’s algorithms are not only considering the market’s direction and movement potential, but also how that potential ranks on a risk-adjusted basis. The idea is that an opportunity can only be evaluated relative to what else is available. For example, how do investors know if a 5% return is satisfactory or not? The answer should be "it depends on what else is available". In other words, the 5% return is only satisfactory or not relative to other options. Only a small portion of all the markets monitored by HAMI's approach get identified as the best, and then it considers only those markets should one of its many trading systems generate a signal.

The portfolio selection method is dynamic and rebalanced every day. From day to day the basket of markets that we will look at trading changes. We feel this keeps HAMI’s trades limited to only those markets with the greatest risk adjusted potential. This allows us to evaluate a large portfolio while still keeping trades and margin requirements low.

Monitoring a large portfolio is crucial because if investors limit themselves to a predetermined small portfolio, how do they know that those markets will be the best markets? (Hindsight bias portfolio selection is a form of curve fitting and is a leading downfall of many traders). If an exceptional opportunity evolves in a market outside a predetermined portfolio, a trader should want to take advantage of it. By trading with Hoffman Asset Management’s trading systems, investors do not randomly rule out any market that may perform well, and they have lowered the probability that a portfolio is merely the product of past performance (curve fit) considerations. The key is researched logic that can do this automatically, and that is what Hoffman Asset Management’s trading strategy uses.

Commodities carry risk and are not suitable for everyone. Past performance is not indicative of future results.