Risk of Losing More than Investment with a CTA?

So as I understand it, most CTA's have you open an account with an FCM, then you sign over power of attorney, and then they trade your account, leaving you completely liable for all losses, which, presumably, includes losses greater than the money you've put into the account.

So has this ever happened? Has anyone been thrown into debt from a managed CTA account?

 

Most people would set up the account through an LLC so they wouldn't be liable for any losses beyond their original investment.

 

Are there a lot of brokerage companies amenable to setting up accounts with LLC's?

 

I think all professional traders, especially futures traders, incorporate themselves under an LLC.

 

Pretty much all of them these days...

Back to the original question. Most CTA's deleverage themselves significantly. You would want to look at the CTA's MER Ratio to get a feel for their leveraging. I suppose if you invested with a manager trading commodities unhedged and got stuck in some lock limit market, there could be problems.

 

I was thinking more notional funding.

 

I think you mean MAR not MER, and the sharpe ratio is the typical measurement for how leveraged a fund is. With notional funding there is a risk of losing your more than your whole investment even if you are a LLC.

 

yes i had a cta lose more than my account years ago. the only good thing is it was a tiny amount that gave me the knowledge to avoid those guys.

 

Dumb move IMO.....why would a futures trader give up the tax benefits associated with trading that instrument?

 

I remember one that lost more than was put up (for some of the investors) back in the late 90's, I think they were selling NG calls when it went to $9-$10 overnight. Something like selling $100 calls way otm near expiration that went to like $5000 the next day.