By: Dean Hoffman
I recently scanned a Commodity Trading Advisor database to look at the typical minimum account sizes for managed futures accounts. I found minimum account sizes ranging from as low as $25,000 to as much as $25 million. I also found that the average CTA trading with a small minimum account sizes tends to have concentrated portfolios, high-margin requirements, little money under management, a short track record and or high volatility. Often, these managers just trade options or are offering a pooled investment.
Diversified trend followers offering individually managed futures accounts seemed to have minimums that were usually at least $1 million.
In the futures markets, small managed futures accounts—those with less than $250,000—face considerable challenges seldom 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. This is not so. Low-margin requirements have long attracted smaller speculators and, can be the proverbial rope with which to hang oneself.
Why Large Managed Futures Accounts Tend to do Better
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 opportunity at any time. There are over 100 tradable commodity markets worldwide and should buy or sell opportunities simultaneously become available in any or all them, a large managed futures account can easily afford the margin and exposure. When it comes to investing, it is said that diversification is the only truly “free lunch.” Large managed futures accounts can afford to diversify with impunity. This is in stark contrast to small managed futures accounts where prudence dictates only having risk and exposure in a few markets simultaneously.
A large managed futures account does not have to shy away from any trading opportunities which may become available, even those whose volatility is fairly high. For example, a London copper trade with a stop loss $14,000 away represents a risk of only 1.4% in a million dollar managed account, but in a smaller managed account of only $100,000, this same trade would represent a risk of a whopping 14%! With such a large risk, stemming from the small size of the account, any sensible trader would be forced to avoid this trade. Having to skip these types of opportunities is yet another penalty paid by the small managed futures account.
On top of this, a large managed futures account can use one of the easiest forms of risk control available: contract scaling. Let’s assume, for example, that a trader has a large account which is long 50 gold contracts during a large bull market run and that they wish to cut their open trade profit exposure. To do this, they can simply scale out as many contracts as they need to lock in profit, all while maintaining their profitable position.
What can the small managed futures account do for scaling out, on the other hand, if he only has one contract in the first place? Once again, the small managed futures account does not enjoy the flexibility to control risk in the same fashion as the large managed futures account.
Now, despite all the negative points that I’ve just summarized above, I still believe that smaller accounts have advantages over large ones. Small accounts are able to trade markets that would be far too illiquid for large accounts. Most institutionally sized funds are almost confined to the trading of financial and energy instruments. They end up missing out on trading opportunities afforded by the traditional physical commodity markets, specifically commodities like grains, foods and fibers. This creates a lack of diversification and an over reliance on those few sectors in which the large account can trade.
The ironic thing about it is that many small accounts end up with this same problem. This is because they have chosen to deal with their small account problem by only trading in a few markets. Some even confine themselves to just one market and so end up missing out on the greatest advantage they have over the “big boys.”
Managed Futures with Hoffman Asset Management
It is for those smaller traders who want the advantages of true global diversification with individually managed, not pooled, accounts that we formed Hoffman Asset Management. Hoffman Asset Management, or HAMI, is carving out a unique niche by offering a managed account program that monitors and trades more than 70 diversified commodity markets. We do this while trading accounts as small as $30,000.
The intent of HAMI’s program’s design is to keep drawdowns and volatility in line with what has previously only been available with a large, widely diversified account. This combination of trading many markets within a small account while keeping volatility in check is truly unique. It fills what we feel is a tremendous void in traditional managed account offerings.
Although what we do is largely proprietary, the basic premise uses a form of relativity. HAMI monitors a large universe of tradable commodities for opportunities, yet is still highly selective in those trades that it will take. For roughly every 10 trading opportunities identified by HAMI’s combination of trading systems, it takes only 1. HAMI’s algorithms consider not only the direction of the market and its movement potential, but also how that potential ranks on a risk-adjusted basis.
Simply put, the idea is that an opportunity can only be evaluated relative to what else is available. For example, how does a trader know if a 5% return is acceptable or not? For a wise trader, the only acceptable answer is that it depends on what else is available. In other words, the acceptability of a 5% return can only be calculated based on the other relative options that are available. Only some of all the markets tracked by HAMI’s strategy get identified as the best and HAMI will consider only those few markets should one of its many trading systems generate a signal.
The portfolio selection process is dynamic and gets rebalanced every day. From day to day there are changes made to the basket of markets that we will consider trading. This keeps HAMI’s trades limited to only those markets that we feel have the best risk adjusted potential, and it allows us to evaluate a large portfolio while still keeping trades and margin requirements low.
Monitoring a large portfolio is key. If traders limit themselves to a predetermined small portfolio, how will they know that those markets are still 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 develops in a market outside his predetermined portfolio, any trader in his right mind would want to take advantage of it. By trading with Hoffman Asset Management’s trading systems, traders have the assurance that no market is arbitrarily ruled out if it has the potential to perform well. With Hoffman Asset Management’s trading systems, the likelihood that a portfolio is merely the product of past performance, or curve fit, considerations are vastly cut.
The key to doing these things is researched logic that can do all this automatically—and that is the secret to Hoffman Asset Management’s trading strategy.
Commodity trading carries risk and is not suitable for all investors. Past performance is not indicative of future performance.
Award Winning Trading Systems
Commodity trading carries risks and is not suitable for all investors. PAST PERFORMANCE IS NOT NECESSARILY INDICATIVE OF FUTURE PERFORMANCE.
R QUANT SYSTEMS LLC is a developer of trading systems. It does not solicit or accept commodity trading accounts, and it does not provide individually tailored advice. R Quant Capital LLC is a commodity trading advisor registered with the U.S. Commodity Futures Trading Commission and a member of the National Futures Association. R Quant Capital LLC offers a managed account program. Prospective investors should review the current disclosure document for R Quant Capital LLC.