A commodity trading advisor (CTA) is an individual or firm that provides individualized advice regarding the buying and selling of futures contracts, options on futures, or certain foreign exchange contracts.
Commodity trading advisors require a Commodity Trading Advisor (CTA) registration, as mandated by the National Futures Association, the self-regulatory organization for the industry.
A CTA acts much like a financial advisor, except that the CTA designation is specific to providing advice related to commodities trading.
- Regulated by the:
- SEC regulates equity and bond-related securities
- CFTC exchange-traded futures and options products as well as foreign exchange
- Registered through the CFTC and members of the National Futures Association (NFA).
Obtaining the CTA registration requires the applicant to pass certain proficiency requirements.
Commodity Trading Advisors (CTAs) are professional investment managers, similar to portfolio managers in mutual funds, who seek to profit from movements in the global financial, commodity, and currency markets by investing in exchange-traded futures and options and OTC forward contracts.
Generally, CTA registration is required for both principals of a firm, as well as all employees dealing with taking orders from, or giving advice to, the public.
Commodity trading advisor requires registration to give advice regarding all forms of commodity investments, including futures contracts, forwards, options, and swaps.
Investments in commodities often involve the use of significant leverage and, therefore, require a higher level of expertise to trade properly while avoiding the potential for large losses.
The regulations for commodity trading advisors date back to the late 1970s as commodity market investing became more accessible to retail investors.
Generally, a CTA fund is a hedge fund that uses futures contracts to achieve its investment objective. CTA funds use a variety of trading strategies to meet their investment objectives, including systematic trading and trend following.
However, good fund managers actively manage investments, using discretionary strategies, such as fundamental analysis, in conjunction with the systematic trading and trend following.
How do CTAs Differ?
CTAs generally manage their clients’ assets using a proprietary trading system or discretionary method that may involve going long or short in futures contracts in areas such as metals (gold, silver), grains (soybeans, corn, wheat), equity indexes (S&P futures, Dow futures, Nasdaq 100 futures), soft commodities (cotton, cocoa, coffee, sugar) as well as foreign currency and U.S government bond futures.
There are a variety of trading methodologies used to identify trading opportunities and implement risk management strategies.
After years of trading and testing methodologies, CTAs maintain a disciplined trading niche through either a systematic or discretionary approach.
- Technical vs. Fundamental
- Systematic vs. Discretionary
- Trading Styles
- Trend Following
- Counter Trend
- Option Writing or Selling
- Global Macro/Fundamental Focus
- Short-Term, Intermediate-Term, and Long-Term
- Emerging vs. Developed Markets
Commodity Trading Advisor vs. Hedge Funds
A CTA trades futures and currencies whereas a hedge fund can trade a greater range of securities.
Also, while investment into a hedge fund would involve wiring the entire principal investment into the hedge fund, for a CTA, the investor only has to put up the cash needed for the margins.
The CTA is an “advisor”, not a “fund”. CTAs are basically managed-futures strategies (because trading commodity futures is way easier and less costly than trading actual commodities), and managed futures are generally set up as a hedge fund structure because that allows higher fees to the owners off of a lower capital base than something like a mutual fund.
Technically, managed futures are a wider category than CTAs, because managed futures can include futures on financial products such as equities, equity indexes, and fixed income products, which are not technically commodities.
However, some traditional CTAs have effectively morphed into managed futures because the ability to trade financial futures improves diversification and can increase returns
For historical reasons, though, these firms may still be known as CTAs.
Vincent Nyagaka is a Professional Trader, Analyst &. He has been actively engaged in market analysis for the past 7 years. He has a monthly readership of 100,000+ traders and has taught over 1,000 students since 2014. Vincent is also an experienced instructor and public speaker. Checkout Vincent’s Professional Trading Course here.