CTA Startup

Discussion in 'Professional Trading' started by BGB, Jan 6, 2004.

  1. BGB


    I am a futures trader that manages money for myself and some clients in a private managed firm. I make a small salary and then per trade commissions on each account. I started as an analyst and have gone from the fundamantal trading side to a believer in the technical side of managing money. My strategy is discretionary but very sound and I have worked on it with my money and othersfor the last couple of years producing strong returns, espite the $75 per round turn commissions I have to deal with. Myfirmis family owned and fundamentally oriented. We have a salesforce that sells a fundamental story to investors. Although, they have raised me some money (about$1 mill), they don't like the technical story and thus don't realize how the vast majority of money is moved today. I have to sit here and trade that amount while others trade $50 mill. plus.
    The point is that I'm trying to get the courage to leave this firm and start my own CTA. I'm exploring the pro's and cons and startup costs. I am also interested in whether a CTA can collect a portion of commission per trade. My biggest question is can I make it work? I don't have loads of money but I do have enough to live on for one year. I think I can raise a couple of mill. to start. What is a good starting number to create decent income? What are the other key costs which I need to consider? Any input from knowledge or experience would be greatly appreciated. It is very hard to find info on this subject. :confused:
  2. Aaron


    Sure, you can receive a portion of the commissions generated on your accounts — as long as it is disclosed. I, personally, would shy away from investing with a CTA that had an incentive to churn my account, though. I just charge a management and performance fee.

    Well, you can easily calculate for yourself what assets you would need to raise to have a "decent income"... For each $million, calculate how much fees you will generate and then divide "decent income" by that amount to get the number of millions you will need. It's good that you have enough to live on for a year. Most of your initial investors are likely to be friends, family, neighbors, and former co-workers. Who do you think you can raise a couple million from?

    Biggest costs are: NFA membership and registration, disclosure doc preparation, accounting, computers, data, and software.

    Good luck and keep us updated!
  3. BGB


    Aaron-Thanks alot for your reply to my post on starting a CTA. I don't really want to publicize too many specifics about my current job b/c I'm obviously still here. I read your web page and it sounds like you made the decision to go it on your own also. I guess the difference b/w us is that you are fully systematic and I still use discretion. If you don't mind I would love to throw a few specific questions at you and see if you can give me any answers at your convenience. The reason I mentioned a commission is that it would obviously help as cash flow in the intial stages. What is a good brokerage commission for me to look for? In my mind I was thinking I can clear for $10 per round turn at the most. Then I was thinking of collecting another $5-$15 that can be used to pay the house and help pay money raisers. How do you compensate people that bring you money? Also, what are the other operating costs you incur? Data feed, insurance, back office costs, accounting. Does your IB take care of the back office work? How much money are you currently managing if you don't mind my asking? Do you fear slippage as your size grows? The only fear I have in my strategy is that my stops will be hard to maintain without too much slippage if I get too big? I can't seem to get a feel for my limits. I guess I can just decrease the risk per trade and thus I end up with fewer contracts per position. Lastly, what is your recommendation on entity? Seems that CTA is easier to start that CPO and I'm still fuzzy about the hedge fund scenario and should I operate as an LLC?. Any input from you or other members on these subjects is greatly appreciated.
  4. Aaron


    I guess the best commission rate to look for would be the lowest one, hey? That would be best for your investors. In any case, how much of a performance ding your investors and your track record takes due to commissions is strongly dependant on how frequently you trade. If you are a daytrader the commission rate is paramount. If you are a long term trendfollower, it's minor.

    The FCM will send out statements to your investors but it will be your responsibility to calculate fees and send that invoice to your IB or FCM.

    It will also be your responsibility to assure that your investors' statements are correct. You'd think they would be, but IB's and FCM's make mistakes. For example, the CBOT lowered their fees for eCBOT trades starting Jan. 1st. Out of the two FCM's I use, neither got the fee change correct — one missed it and the other actually raised the fee charged to my accounts. And we're talking Goldman Sachs and Man Financial — you'd think they could get it right! You have to check all statements for accuracy and get errors fixed.

    I manage about $5.5m. I trade the Nasdaq, Dax, and T-notes. These are very liquid markets and I'm still pretty tiny. I'm not concerned about slippage yet. At some point it is an issue, but I'm far far from that point. I'd say don't worry about growing too big until you are up and running.

    Starting a pool is more work upfront. I manage both a pool and separately managed accounts. They each have their advantages. If you are going to have big $million+ accounts, I'd recommend separately managed accounts. These institutional investors will want the transparency and, probably, cross-margining with other managers. If you will be managing small accounts, a pool is a convenient way to have to just deal with a single trade and a single daily statement. A pool requires a limited partnership or LLC and there are blue sky laws and SEC regs to deal with.

    You personally might start off as a sole proprietor and change to an LLC once you are up and running. An LLC will provide better liability asset protection.
  5. rwk


    The CME (http://www.cme.com/) has a free booklet entitled "How to Become a CTA". I highly recommend it.

    The most common forms of CTA compensation are management fee (based on assets under management) and incentive fee (based on net gain in the value of the assets). Investors tend to prefer incentive fees, but if you have a rough period, you won't have any income even as your expenses continue.

    The most important considerations in choosing a broker are service and integrity. For the volume you are talking about, you should be able to negotiate a commission structure of $15 or less per contract per round turn. I consider anything over $20 to be excessive.

    Good luck!

  6. Aaron


    Is that available online, or do you have to call the CME?
  7. rwk


    I did a quick scan of the Web site and couldn't find it. I think they still have copies if you call or send email. The current edition is a 2000 reprint of a book developed from a series of seminars held in 1992-1994.
  8. ktm


    An awful lot has changed since even 2000 in the CTA/CPO arena in terms of regs. There are a number of exemptions (in the 4.7 area) that were just done earlier this year.

    I would second Aaron's advice. There are many routes to take and plan on a long startup period, 9 months minimum before you can actually start running the fund. You will need a record after startup as well. If it's possible, I would recommend doing as much as possible while still employed. The less funds you have to remove from your fund, the more you can keep under management and the more time you have to build your funds while earning a salary. High commissions are a red flag, and I agree with Aaron about trying to keep them low, although the bottom line return to partners is the most important figure.

    Check out greencompany.com (hedge funds) for some good reading and free advice about starting out.
  9. jessie


    The NFA also has info on the regs and disclosure documents, and they are really helpful in getting you started if you let them know you are new. As far as how to compensate brokers that bring you funds, it is common practice for them to "handle" the account and then be compensated from the commissions, and for you to receive your income from incentive and management fees. 20% & 2% are the most common figures, although everything is negotiable, esp. for large accounts. An advantage to having the broker structure I describe is then the broker becomes the "point man" in dealing with "their" investors, so you aren't on the phone all the time trying to explain a 3% drawdown. At the same time, they don't have to try and sell someone trade-by-trade, they get a regular, fairly pain-free income stream too. I know brokers who charge CTA clients $12-14 R/T and still make decent money on comissions. They win / you win. I would agree that it is preferable for you as a CTA not to receive part of the commissions, as that represents a potentially large conflict of interest, especially when things aren't going well with trading.
    Good Luck!
  10. BGB


    The forum seems to have quieted down quiet a bit. Wondering if there are any other opinions/ideas on becoming a CTA? How to start one? regulations to watch for? Startup costs? Entity formation? Insight from others who have left a good paying postion to embark on their own? Also, if it makes more sense to become a CTA, CPO, or Hedge fund? I'm am constantly analyzing the situation and hope to make a move by the end of the quarter. Thank you for any insight.
    #10     Jan 13, 2004