Margin/equity, for CPOs/CTAs

Discussion in 'Professional Trading' started by heech, Aug 26, 2009.

  1. heech


    Hi there,

    I'm still learning about the CPO/CTA business, so here's a newbie question.

    How important is that margin/equity ratio? I've been told 20% is more or less standard, and 40-50% is perceived as "aggressive".

    Just as background, let's make clear I'm talking about medium-sized investors potentially putting $500k-$10m to work, not institutional funds looking to place $50m.

    For this class of investor, how likely are they to look at this number? Or are they only focused on Sharpe + ROR + drawdown numbers?
  2. Well margin/equity ratio really depends on what your objective is and obviously waht % of your assets you would like to invest, so that part I cannot answer.

    As far a criteria go, when we choose one we look at the following (no particular order):

    Correlation, obviously the point is to diversify so it can't be too correlated to any "traditional" asset classes.

    Drawdown, ROR ok. Sharpe is useless in these, volatility is too unpredictable because it does not give you a good idea of the actual risks you are taking. Skew and kurtosis are more relevant... Omega is also useful.

    One last thing: NO SMA = NO GO, that is an institutional requirement but I suggest you insist also
  3. heech


    Very useful thoughts, thanks.

    By SMA, are you referring to separately managed account? I'm strongly inclined to NOT offer that as an option.... I want to keep my specific trading activity closer to the vest.

    Hopefully by having a credible audit + admin firm, that wouldn't be an issue.


    Great Insight,
  5. heech


    Anyone with any insight on the rates these larger administrators cost?

    I've been put in touch with a few local sole-practictioner types on the admin side. These are people affiliated with leading audit firms, so it's not a bad startup choice. But I'm wondering how much it would cost to go with a larger administrator from the get-go.
  6. You will find some answers here :–-what-is-a-hedge-fund-administrator.html
  7. Having done manager selection for several years, I can tell you that this is a very important number. It can vary from strategy to strategy, but for the most part it's a good indicator of the type of risk that the manager is employing. I would keep it below 20% (max), and an average that is considerably lower. For me, the lower the better...the investor can always notionally fund the account to get to their desired risk, vol, M/E, return, etc..

    The other point that I would like to make is on offering managed accounts. There are very few CTA's that don't offer MA's. Typically, when a manager is afraid of their strategy being reverse engineered, it's unfounded. It's usually individual pikers that are afraid of it. Having a fund is no substitute for transparency, control, and liquidity...which is what many investors are looking for these days. You can always pick and chose your investors, as well, as most aren't going to have the know how anyway.

    Good luck!

  8. heech


    Appreciate the insight! I think I'll have a pretty good explanation of why I don't want to share my specific positions (live). It's not necessarily an issue of reverse engineering the strategy, but more because it's an automated strategy, it potentially makes it possible for others to front-run.

    I'm still not really clear as to how investors (or tracking sites like autumngold or barclay's) approach the distinction between a "hedge fund" versus a CPO... when in my mind, the two can be the same thing. But perhaps I will just emphasize my trading is closer to that of a hedge fund and require some secrecy, even as I'm only trading physical commodities + options.

    On the M/E ratio, I'm primarily an option seller. I've been told that sophisticated investors understand M/E ratios for option sellers are higher (in my opinion, because both the M and E numbers are inflated by the same net option value). But I'll probably target the 20% number as <b>average</b> ME, and assume that means I won't get screened out... and will at least have the opportunity to explain the specifics of my trading.
  9. You're going to get screened out by most CTA investors by being an option seller...but good luck. What is going to set you apart from the 20+ other CTA's out there doing the same thing?
    #10     Sep 3, 2009