Over the years I’ve found people perform varying degrees of due diligence of a Commodity Trading Advisor (CTA). Some may only crunch the returns of the manager. Others will only ask the CTA to fill out a due diligence questionnaire and some will do a full due diligence process on the manager including research and operational due diligence. The first two points listed are good places to start, but is not the ending point as your goal is to get as close to a full due diligence process as possible.
Regarding the research/strategy component of due diligence, below are five major ideas to keep in mind when performing due diligence on a manager:
1) You want to know and understand as much as possible about the manager’s strategy. In my article from a few years ago “Decoding the Myths of Managed Futures” I mentioned that some have stated they were intimidated by the so called “black box” and the managers would not tell them very much. There was a time in the past when managers were cautious of explaining the details of their system due to replication risk, but not today. Only having the manager fill out a questionnaire tells a small part of their entire profile. You should be doing onsite visits of their office.
2) Some of the questions to ask a manager include: READ MORE
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Copyright ©2013 Mark Shore. Contact the author for permission for republication at firstname.lastname@example.org Mark Shore has more than 25 years of experience in the futures markets and managed futures, publishes research, consults on alternative investments and conducts educational workshops. www.shorecapmgmt.com
Mark Shore is also an Adjunct Professor and Board Member of Arditti Center of Risk Management at DePaul University's Kellstadt Graduate School of Business in Chicago where he teaches a managed futures / global macro course and an Adjunct at the New York Institute of Finance. Mark is a contributing writer to Reuters HedgeWorld, CBOE Future Exchange (CFE) and Micro-Cap Review.
Past performance is not necessarily indicative of future results. There is risk of loss when investing in futures and options. Futures and options can be a volatile and risky investment; only use appropriate risk capital; this investment is not for everyone. The opinions expressed are solely those of the author and are only for educational purposes. Please talk to your financial advisor before making any investment decisions.