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What is a Commodity Trading Advisor (CTA)?

cta hedge funds Mar 23, 2022

Most traders and investors don't know what Commodity Trader Advisors (CTA) are, or how valuable they can be when figuring out how to trade or invest in different markets.

In this blog article you will not only learn what Commodity Trading Advisors (CTA) are, but you will understand why some of the richest and most powerful clients and institutions use them to add to their portfolios.

Commodity Trading Advisor (CTA)

A Commodity Trading Advisor (CTA) is an individual or firm that for compensation or profit, advises others on trading or investing in commodity futures, options on futures or retail off-exchange forex contracts and swaps.

Commodity Trading Advisors (CTA) can authorize discretion to trade on behalf of clients or businesses. These are known as Managed Futures accounts or Alternative Investments.

All Commodity Trading Advisors (CTA) must pass the Series 3 examination and be a member of the National Futures Association (NFA), and register with the Commodity Futures Trading Commission (CFTC), unless certain exemptions are met.

It's extremely important as a trader or investor to understand what options you have. Many people don't realize that these special services even exist or how to access them!

Commodity Trading Advisors (CTA) are open to all investors depending on the program offered by the Commodity Trading Advisor (CTA). Some Commodity Trading Advisors (CTA) operate as exempt and only offer services to QEP (Qualified Eligible Participants). A fully registered Commodity Trading Advisor (CTA) can offer their investment program to anyone so long as the client can provide the minimum funding and except all of the risk disclosures. Commodity Trading Advisors (CTA) can have multiple programs, on multiple asset classes, using all different types of strategies using futures, options on futures, forex and swaps.

Why would a client choose to work with a Commodity Trading Advisor (CTA)?

You have to understand that Commodity Trading Advisors (CTA) are a unique type of hedge fund. They not only serve retail clients, but they also serve institutions, suppliers and manufacturers of all kinds. This is because they can hedge any cash market position using futures contracts, options on futures, forex and swaps, as well as provide risk-adjusted returns that produce alpha to supplement beta portfolios.

Here is a quick example. Let's say you had a large commercial real estate institution that had 5 billion dollars of real estate. They of course don't own all of this real estate free and clear, they have risk in the form of mortgages. This price risk comes in the form of interest rate risk. Now a large institution of this magnitude could easily work with a CTA to hedge that interest rate risk using bond futures. Of course this example is extremely simple and I'm not going in to the details of how exactly something like this would work but this just gives you an idea that there are many businesses in the world that all face price risk and Commodity Trading Advisors (CTA) help these clients mitigate and reduce price risk.

Commodity Trading Advisors (CTA) also help clients speculate in different commodity markets. Remember markets are made up of those who need to transfer risk, and those who except that risk so they can speculate, this adds to liquidity and the ability to have price discovery. So maybe a client wants to create some monthly income using options on futures, they could find a Commodity Trading Advisor (CTA) that has a suitable program designed especially for that need.

Most people in the world are stuck in this view that a hedge fund or Commodity Trading Advisors (CTA) benchmark should be compared and judged based on its performance against the SP500 or NASDAQ. This couldn't be further from the truth. These vehicles are not necessarily designed to beat market indexes, but to produce those risk-adjusted, uncorrelated alpha returns that supplement a beta weighted portfolio. This is especially true during times of extreme volatility and uncertain market conditions.

Where to find Commodity Trading Advisors (CTA)?

Nothing in these blog articles is trading, financial or investment advice. You should always consult with your licensed CPA and lawyer to see if these investment vehicles may be right for your financial situation and risk tolerances.

With that said there are numerous places online that list Commodity Trading Advisors (CTA) and their results and programs.

Here is a list of relevant information regarding Commodity Trading Advisors (CTA) and Alternative Investments:

Conclusion

While this is no means a full guide covering every aspect of Commodity Trading Advisors (CTA), this is enough information to really spark your interest and open your mind to the possibilities that these investment vehicles can offer you.

Commodity Trading Advisors (CTA) are complex business structures that require extreme due diligence and compliance by the operators and the investors. These investments are not for everyone.

Trading securities is risky and you must accept this risk. Please check out The Daily Option's Risk Disclosure for more information.

I hope you enjoyed this short blog post on Commodity Trading Advisors (CTA). Do yourself a favor and read as much as you can to learn about this incredible industry and what it can do for you as a trader and investor!

Stock photos on this blog were provided by https://www.pexels.com/, generously from @ann.poan and @didssph.

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