Consider A CTA Managed Fund For Balanced Asset Allocation - There are many investment strategies for both the novice and sophisticated investor. The CTA managed fund has been overlooked until recently. Now the top performing investments are managed by CTA's and you should consider including these in your portfolio. |
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You are here: DIME Home > Finance > Consider A CTA Managed Fund For Balanced Asset Allocation
There are many investment strategies for both the novice and sophisticated investor. The CTA managed fund has been overlooked until recently. Now the top performing investments are managed by CTA's and you should consider including these in your portfolio.
Author: Dwayne Strocen
Date: Sep 14, 2009 - 8:14:00 PM
You might be wondering what
a CTA is.
A CTA is a Portfolio Manager
for derivative products such as foreign exchange, commodities or futures.
If you're familiar with
traditional mutual funds or hedge funds,
you'll know the investment decisions are made by a specialist in stocks or
bonds.
These are also called equity and
fixed income products.
An equity fund is managed by
an equity Portfolio Manager known as a CFA and a bond fund is managed by a
fixed income Portfolio Manager also a CFA.
Their exists a third type of Portfolio Manager and that is one
responsible for managing a fund which is invested in products like currency,
carbon emissions, precious metals, agriculture products and others.
These Portfolio Managers are known as CTAs
and they manage CTA funds sometimes known as a Managed Futures Fund.
Despite the obvious, each
investment style has its own unique characteristics.
For example, a traditional equity investor only makes money when
the stock market is rising. They lose money during a falling or bear
market.
Wouldn't it be fantastic to win
no matter which direction the market went.
Well that is exactly what happens in a CTA fund.
The CTA can buy or sell at random.
We call this being "long" or
"short".
When long, you're
betting the market is going up and when short, you're betting the market is
falling.
A CTA makes money no matter
which direction prices are headed.
Now that you know the
basics, lets look at why CTA funds have out performed equity and bond
funds.
Since September 2008 the wall
street induced sub-prime mortgage fiasco has caused stock prices to
plummet.
If you held an equity mutual
fund or a stock portfolio of your own, you will have lost money.
In fact since Sept 1, 2008 the Dow Jones
Industrial Average has lost 20.36 percent. According to the Managed Futures CTA
database, the average CTA Fund YTD ROR (Rate of Return) to June 2009 is +2.14
percent.
That’s a whopping difference
of 22.50 percent.
These funds are
definitely worth looking at.
A major advantage is the
ability to trade the underlying commodity product.
Why buy a company that's involved in oil extraction when you can
buy the oil itself.
The reason why
stock market investing becomes difficult, is the many different factors that
come into play.
There is the ability of
management, economic pressure, competitive pressure, union demands, changing
consumer habits and a host of other factors that determine the profitability of
a company.
A CTA fund has none of these
issues to contend with.
Investors who
purchase Aluminum or High Grade Copper on the New York Mercantile Exchange are
affected only by issues of Supply And Demand.
During economic periods of growth, prices rise and during periods of
recession, prices fall.
So while your
equity fund is sitting on the sidelines waiting for a market re-bound, the CTA
fund is profitably trading a falling market.
I would be remiss if I did
not discuss the use of leverage.
Unlike
an equity fund, A CTA fund uses leverage.
For example, to purchase $100,000 Canadian Dollars cost only $350 to the
CTA. So when the dollar rises from 91 cents to 92 cents, the fund makes a
profit of US$1,000.
That equates to a
186 percent profit.
If we look at this
from another angle it might become clear.
To purchase 1,000 barrels of crude oil at US$60 per barrel would cost
US$60,000 to the cash consumer.
The
NYMEX charges a deposit, we call this margin, of US$6,000.
Should Crude Oil rise to $65 dollars, the
profit is $5,000 or 83 percent profit.
Of course, the use of
leverage can be dangerous as losses can quickly escalate.
Should Crude Oil have fallen to $55 instead
of rising, a loss of $5,000 would have resulted.
Of course, CTA funds are not the only funds to utilize
leverage.
Many equity hedge funds use
leverage routinely and depending on your overall investment objective a
balanced asset mix will dictate the percentage of your portfolio allocated to
such a fund.
There are many types of CTA funds to select from.
Agriculture funds, energy funds,
foreign exchange funds, index funds, fixed
income funds and greenhouse gas or global warming funds.
Choose the one that’s right for you, but
when balancing your investment portfolio don't over look
this important sector for proper and
complete asset allocation.
Dwayne Strocen is a registered CTA, Portfolio Manager.
He manages the Global Climate Fund, an
environmentally friendly hedge fund focused on the reduction of greenhouse
gases.
Website:
http://www.genuineCTA.com
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