I will attempt to explain my thoughts on why a CTA is better than a CPO. This is strictly my opinion and is based on my experience with my pool versus my managed accounts. With a CTA your startup costs are much lower. All you have to do is pay for the S-3, pay your registration to the NFA and whatever it costs to set up and LLC or LP in your state and you are off. Your cost to start a CPO is around $1000-1500, if I remember correctly. With a CPO you will have to pay the above costs, plus it is advisable to hire an attorney to set up your docs and you will be required to get an annual audit which costs as well. If you do not include the annual audit your start up existences will be around $7500. When I got quotes for my audit after the first year they ranged from $3500-$50K. Now obviously the $50K was from a larger company that does a lot of work for sizeable money managers. I opted for the cheaper audit and everything turned out fine. However, if you want to have a pool but still want institutional money chances are you are going to need a well known accounting firm to do your audits. This is because institutions want transparency and liquidity and if you can't offer them that they, at the very minimum, want to see an audit from a known firm. At the time of my audit I did have some institutional money under management, but they were all in managed accounts so I opted for the cheapest audit I could find for the pool. Which brings me to my next point. As institutions look at emerging managers it is highly unlikely that they are going to feel comfortable investing in a pool. They want total transparency and liquidity. They want the ability to pull their funds at a moments notice if something goes wrong or, in some cases, if the wind is blowing the wrong direction. Meaning they can be very fickle. Bottom line is that if you are an emerging manager and want to attract as much money as possible it is best to stick with managed accounts only. If you are an established manager or have a lot of money backing you to start off with and you want to avoid reverse engineering risk then go with a CPO. For me I started off with only $250K and put it in the pool. That was the last $250K that went into the pool. Everyone who invested after the initial start up date wanted managed accounts. For me I found that all the demand was for managed not pooled. Hope this was of some help. If there are any other managers out there that feel differently it would be great to hear.
I will attempt to explain my thoughts on why a CTA is better than a CPO. This is strictly my opinion and is based on my experience with my pool versus my managed accounts. With a CTA your startup costs are much lower. All you have to do is pay for the S-3, pay your registration to the NFA and whatever it costs to set up and LLC or LP in your state and you are off. Your cost to start a CPO is around $1000-1500, if I remember correctly. With a CPO you will have to pay the above costs, plus it is advisable to hire an attorney to set up your docs and you will be required to get an annual audit which costs as well. If you do not include the annual audit your start up existences will be around $7500. When I got quotes for my audit after the first year they ranged from $3500-$50K. Now obviously the $50K was from a larger company that does a lot of work for sizeable money managers. I opted for the cheaper audit and everything turned out fine. However, if you want to have a pool but still want institutional money chances are you are going to need a well known accounting firm to do your audits. This is because institutions want transparency and liquidity and if you can't offer them that they, at the very minimum, want to see an audit from a known firm. At the time of my audit I did have some institutional money under management, but they were all in managed accounts so I opted for the cheapest audit I could find for the pool. Which brings me to my next point. As institutions look at emerging managers it is highly unlikely that they are going to feel comfortable investing in a pool. They want total transparency and liquidity. They want the ability to pull their funds at a moments notice if something goes wrong or, in some cases, if the wind is blowing the wrong direction. Meaning they can be very fickle. Bottom line is that if you are an emerging manager and want to attract as much money as possible it is best to stick with managed accounts only. If you are an established manager or have a lot of money backing you to start off with and you want to avoid reverse engineering risk then go with a CPO. For me I started off with only $250K and put it in the pool. That was the last $250K that went into the pool. Everyone who invested after the initial start up date wanted managed accounts. For me I found that all the demand was for managed not pooled. Hope this was of some help. If there are any other managers out there that feel differently it would be great to hear. Aaron: I under impression that you are CTA and CPO as well. What is your experience regarding CTA vs. CPO? Thanks.
I've got just the opposite as Longview. He has one investor in the pool and everyone else has a managed account and I've got one managed account and everyone else is in the pool. I find it easier to trade a single account (well, two, actually) than to mess with having to check on allocations to each individual account. And performance calculations are a lot easier with only two accounts. Perhaps for Longview the administrative work of a CPO (account statements, audits, taxes, an additional LP or LLC) might outweigh the administrative work of many separate accounts, but not for us. I think it is easier to raise money as a CTA offering separate accounts. I get many calls from IB's (introducing brokers) asking if we can trade a account for a client of theirs with, say, $40k. It doesn't work for us for a couple reasons. These brokers want us to execute the trades through them and the brokers often want to charge their client what I think is an exorbitant commission rate. Since Schindler Trading's trading is automated through Interactive Broker's (and, soon, Man Financial's) API (programming interface) and this is custom software, we can't execute through other brokers. And even if we could, Schindler Trading's strategies are very active and these high commission rates would hurt performance too much. So we have to pass on these requests. But if you were a less-frequent trader and could accomodate these requests, you could build up your assets pretty quickly. The best Schindler Trading can do for these brokers is to offer them a share of our fee income for a referal, but only a couple brokers have taken us up on this offer. Brokers generally want a permanent trail of commission dollars. Another difference between CTA's and CPO's is that CTA's can advertise, but the unregistered security that a CPO is offering (shares in a limited partnership, for example) can not be publicly offered.
Since Schindler Trading's trading is automated through Interactive Broker's (and, soon, Man Financial's) Do you mean you will move to Man Financial? Why? I though interactive broker fee is very low already.
Yes, Interactive Brokers (IB) has excellent rates. But at 50k round trips per year, Schindler Trading does enough futures volume that we were able to negotiate an even better rate through Man Financial. We are in the advanced stages of testing our automated trading strategies at Man. For a smaller volume trader, including most individuals, you can check with the other brokers, but you will probably get your best deal at IB. Besides good commission rates, you can trade many different markets out of a single "universal" account at IB, and IB pays a good interest rate on cash balances, including short sale proceeds.
But at 50k round trips per year, Schindler Trading does enough futures volume that we were able to negotiate an even better rate through Man Financial. 50k round trips are a lot. Is fee the only reason you move from interactive brokers to Man? Or Man provides better services in other areas and what are those?
Each firm has its strengths and weaknesses, but of prime importance is making money. With equivalent access to the same exchanges at a lower commission rate, we're going to make more money at Man. This, by the way, is an advantage of a CPO vs. CTA. Schindler Trading has to move two accounts to take advantage of lower commissions. One is a pool we are the custodian for and the other is a managed account. Could a CTA with 100 separate accounts negotiate and take advantage of lower commissions? I think such a CTA is locked in to using the introducing brokers who brought him his business. The investors will suffer with bloated commissions and the CTA will suffer with stunted returns in his track record.
Oh, and speaking of CTA's being tied to the Introducing Brokers bringing them clients and the high commission rates of those brokers... At least those CTA's have someone bringing them business. Without brokers bringing us business, Schindler Trading has no sales channel. That's a disadvantage to being a CPO like us focused on returns rather than asset gathering. I hate that we have to pick between having lots of assets or paying low commissions and getting good returns. It shouldn't have to be that way -- and someday I hope it won't. For now there is nobody out there selling Schindler Trading to their clients -- no futures brokers or financial planners. Investors have to find Schindler Trading on their own through CTA and hedge fund databases or the occasional press coverage and then be sophisticated enough to be comfortable with "managed futures". That's not a lot of people. This explains how a program with 28.9% annualized returns over 5 years (see www.schindlertrading.com/index.php?page=performance) can have only $4 million under management. Imagine a mutual fund manager who returned 300% over the past 5 years during which the S&P gained only 31% -- they'd have to close their fund to stem the inflow of assets! PAST PERFORMANCE IS NOT NECESSARILY INDICATIVE OF FUTURE RESULTS. FUTURES TRADING IS SPECULATIVE AND INVOLVES A HIGH DEGREE OF RISK.
The best Schindler Trading can do for these brokers is to offer them a share of our fee income for a referal, but only a couple brokers have taken us up on this offer. Brokers generally want a permanent trail of commission dollars. Did you mean you proposed the client to joint your CPO program (instead of CTA managed account program they intent to do originally) and you proposed to share fee with the brokers?