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Multi-CTA Managed-Futures Funds

A diversified but expensive approach to managed futures.

Terry Tian, 09/27/2012

Before the launch of the first managed-futures mutual fund in 2007, investors could only gain access to managed futures through commodity pools or separate accounts, managed by entities called commodity trading advisors. These pools or separate accounts often had large minimum investment requirements and frequently required an investor to be accredited. The proliferation of alternative mutual funds in recent years has enabled any individual investor to gain access to these CTAs. The first launched at the end of 2009 as a fund of multiple CTAs. Since then, at least nine other multi-CTA funds have launched, along with six single CTA funds. 

In this article, we examine the four biggest multi-CTA mutual funds under our coverage (Altegris Managed Futures Strategy MFTAX, Grant Park Managed Futures Strategy GPFAX, MutualHedge Frontier Legends MHFAX, and Princeton Futures Strategy PFFAX) and evaluate them based on attributes that are particularly important to this strategy. 

The Value of a Multi-CTA Fund
A multi-CTA managed-futures fund can provide value to investors in a number of ways. First, compared with a commodity pool or separate account CTA investment, a multi-CTA mutual fund avoids the high investment minimum and net-worth requirements. Second, a multi-CTA fund manager opens separate accounts with the underlying CTAs and has control of the assets, unlike in a commodity pool. The manager also typically conducts extensive due diligence when selecting the CTAs, in order to further reduce operational risk. Third, a multi-CTA fund has the ability to diversify among several different futures trading strategies, while most single-manager managed-futures mutual funds are pure trend-followers. And finally, a multi-CTA fund manager can add value by over- and underweighting the various CTA strategies based on his judgment of market conditions.

Despite these merits, multi-CTA strategies also carry unique risk factors. When considering investing in such funds, investors should pay special attention to transparency, CTA and strategy overlap, and fees. 

Transparency
A multi-CTA mutual fund has to set up an offshore entity in order to invest in the underlying CTAs (because of arcane tax laws that treat commodity exposure in mutual funds as “bad income”). According to current SEC regulations, activities within the offshore entity (that is, information about the underlying CTAs and their investments) are not required to be disclosed. However, some firms choose to be more transparent than others. Transparency plays a major role in fund evaluation and could also serve as an important sign of investor-friendliness.

Altegris and MutualHedge provide investors with the most comprehensive information on underlying CTAs, such as the firm names and manager backgrounds, the track records of the CTA programs they invest in, and the percentage allocation to each CTA. Grant Park only shows the names of its underlying CTAs. And investors can’t find any specific information about underlying CTAs on the Princeton fund’s website. It’s difficult to have confidence in an investment when one has no idea what he is invested in.

Table 1: Transparency of Multi-CTA Managed-Futures Funds

Terry Tian is an alternative investments analyst at Morningstar.
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