CTA Prop Trading Record - Notional?

Discussion in 'Professional Trading' started by heech, Nov 18, 2009.

  1. heech



    I'm prop trading my strategy right now, and in the long run am considering a CTA/CPO approach. So, I'm having someone look over my results and calculate NFA-compliant performance results.

    The "problem" is that I leverage up my funds far greater than what I'd do with investor funds. Basically, I see my own prop account as being 50% "notionally funded"... so returns up/down are multiplied by 2.

    I've been told NFA doesn't let us arbitrarily choose notional % when showing prop trading results, so I have to show the more volatile numbers.

    Any suggestions on how to get around this?

    One proposal was to establish another account with a small account, solely for the purpose of establishing track record (rather than making money). Seems like a hassle, I'd rather not.

    I'm also considering just firing up a CTA shell structure (whatever it costs... $15k-25k?), and just starting to trade that instead of "prop" trading. Any thoughts there?
  2. So what is your (average) "performance bond to equity ratio (PBER)" in your current account?
  3. Biog


    Go the second route, form the CTA structure to develop a track record you can market. That's the route I took and works easier on getting the numbers approved by the NFA.
  4. heech


    On average, it's about 40%. Max goes up to 55%. My target MER will be 20%.
  5. How did you arrive the conclusion of "about 40%".

    I mainly try to understand how did you calculate that? Give me an example, if you would like to.
  6. heech


    It's very straight forward. My FCM (Vision) sends me a detailed equity run statement at the end of every day. I pull from it my current initial/maintenance margin number, my net equity (minus a few adjustments as mentioned above)... and I divide to get the margin/equity ratio.

    I then average this number over the course of a month. I monitor this number and add/remove risk as needed to make sure I'm in the range I'm targeting.
  7. heech


    By the way, I've been researching the original question, and apparently it's not a big deal. At least, the NFA documents suggest it's legal to make a "leverage" change, and to then show results as pro-forma.

    I say this without having actually gone through the NFA approval process yet. I'll know a lot more in a month or two.
  8. Do you mean the statement you receive from Vision contents the initial/maintenance margin number for each position your have?

    So do you use initial margin number or maintenance margin number?
    Is initial/maintenance margin intra day or overnight?

    Did you check such number with the number provided by exchange (not FCM)?

    If they are different, which one do you use?
  9. heech


    Vision provides margin number for each account, not individual position.

    If you're a CTA doing managed accounts, you probably have to do initial maintenance, since you'll be held to that number. I'm doing a hedge fund structured as a CPO, so the margin/equity number is just a reference I'll be putting in the disclosure docs as a target risk level... so as long as I'm consistent, I should be okay.

    I'm sure these are overnight numbers. SPAN isn't really used for intraday risk, as far as I know. Intraday risk is usually set in other ways.

    I have the $500 PC-SPAN program purchased directly from the CME. (You can use that to calculate margin for each individual position, if you'd like.) With an earlier FCM (RCG), they were charging me 200% of SPAN margin... and they were doing it incorrectly, to boot. Idiots. I was able to compare to my PC-SPAN results and figure out what was happening.

    Now, with Vision... I used it originally to confirm that my risk level with the FCM was set to 100% exchange SPAN, as Vision promised. These guys have been on the ball and delivered. I don't check PC-SPAN any more on a daily basis, really no reason to.
  10. I have a similar question. I went through the NFA guidelines fro CTA disclosure statements. I wasn't still clear about reporting notional and nominal accounts...


    On the first month, an account is notionally funded starting with $250k (but treated as $1M nominal) and thus is traded at 4x leverage. Then another $1M comes in second month and is traded at 1x leverage. The first $250k is still traded at 4x leverage... Will it be OK to report the AUM as:

    Month 1, Month 2
    $1M, $2M

    #10     Aug 9, 2011