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How to Invest With the Best and Brightest Commodity Traders

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Commodity trading has always struck fear into the hearts of investors and their advisors, but it may just be the diversification that investors need to support their portfolios in these volatile times. Many of these diversified traders are the best in the investment world.

Take David Harding, the ‘H’ in the Man AHL Fund who left to start Winton Capital Management, which now manages billions.  If you had invested in his Winton Futures Fund in 1997 when it launched, your money would have grown by almost 1000%, bringing in a compounded annual return of 13.73%. That is what a diversified commodity trading adviser can add to a portfolio.

While many asset classes are flailing this year, managed futures have gotten off to a healthy start. Through February, the BarclayHedge CTA (Commodity Trading Advisor) Index is up 2.94%. Within the group, the best performers are those traders who are diversified (up 4.33%) and/or systematic  (up 3.97%). And though overall CTA mutual funds have not been stellar performers (up 0.24% measured by SG Index), the BTop 50 CTAs have gained 1.51% through February.

Investors and advisors should be interested in the diversification that managed futures add to any portfolio, but high investment minimums and fears of elevated risk have kept many at bay. Today, however, it’s possible to access large CTAs through several mutual funds.

Some of these funds are pared down versions of a larger CTA program, built around what the managed futures business calls “smart beta.” Simply put, these are the internal trend-following strategies within some of the larger CTA programs.

Many CTAs have extracted a portion of their portfolio for separate investment. They often don’t charge management fees, just small incentive fees, and can be accessed through CTA managed accounts, which may have high minimums, or through ‘40 Act mutual funds. For example, Equinox Funds offers several of these mutual funds, including those that are “smart beta” programs.

But what if you wanted direct exposure to some of the world’s top CTAs?

How to Invest with the World’s Top CTAs

Usually investing in CTAs such as Winton, Man AHL, Transtrend, Systematica and Altis would take über deep pockets, but in 2011 Quest Partners designed the Quest Tracker Index (QTI), which replicates top CTA programs, without some of their style drifts.

Since its start, the QTI has had a cumulative total return of 22.13%, an annualized compounded return of 4.63% and an annualized standard deviation of 12.99%. Its correlation to the S&P 500 is -0.11. This year through February the program is up a whopping 11.51%, after a loss of 8.11% in 2015 (in 2014 it gained 20.97%).

Nigol Koulajian, founder and CEO of Quest Partners in New York, notes that although they “replicate the main component of each of these CTAs,” QTI has less  exposure to fixed income and fewer long-only positions and includes more short-term trades. What it does not include are carry trades, mean reversion, spread trading and fixed long equity exposure.

All this contributes to QTI having less volatility during equity corrections, providing better protection for investors. “We wanted to maintain the purity of momentum trading. We’ve done something more valuable: It’s for when someone is looking for protection during equity corrections. When the S&P is down, we do better, and when it is up we underperform slightly.” He says QTI has an 86% correlation to the BTop50 Index (top global CTAs measured by BarclayHedge).

How to Access QTI

Quest Partners has its own QTI fund, which can be accessed through managed accounts and charges fees of 50-90 basis points per year. Koulajian says the formula for the index is available for those interested; it isn’t “a black box, but transparent.”

Investors can also access QTI through the Equinox Mutual Hedge Futures Strategy Fund or through the DB Select platform that is part of Deusche Bank’s Private Wealth Management Group or the Morgan Stanley UCITs platform, with minimums in the $250,000 range.

Why would an investor or investment advisor be interested? “People come to us because they see the performance and the low fees. Some are just interested in the formula,” Koulajian says. “But if I told you over the past four years you could have outperformed the largest CTAs with a high correlation and total model transparency, you can see why people are interested.”


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