I recently scanned a Commodity Trading Advisor database to look at the typical minimum account sizes for managed futures accounts. I found minimum account size ranges from as low as $25,000 to as much as $25 million. I also found that the typical CTA trading with small account sizes often has concentrated portfolios, high-margin requirements, little money under management, a short track-record or high volatility. Often, these managers trade only options or are offering a pooled investment.
Diversified trend followers offering individually managed futures accounts usually seemed to have minimums of at least $1 million or more.
In the futures markets, small managed futures accounts (those with less than $250,000) face challenges seldom felt by large accounts. Considering most commodity futures contracts have contract values in the tens or hundreds of thousands of dollars, it is easy to surmise that these contracts are for larger accounts. This assumption is false. Low-margin requirements have long attracted smaller-speculators and are often the rope used to hang oneself.
Why Large-Managed Futures Accounts Often Perform Better
Let’s analyze why large managed futures accounts may have it easier than small accounts.
First, sizable managed futures accounts can trade any opportunity at any time. More than a hundred tradable commodity markets exist, and should buy or sell opportunities become available in any or all them; a large managed futures account can afford the margin and exposure. Professional traders often say that when investing, “diversification is the only free lunch.” Large managed futures accounts can afford to diversify with impunity. This ability is in stark contrast with small managed futures accounts where prudence dictates having risk and exposure in only a few markets at most.
A large managed futures account does not have to shy away from any trading opportunities; including trades where volatility is high. For example, a London copper trade with a stop loss $14,000 away constitutes a risk of 1.4% in a million-dollar managed account, but in a smaller managed account of $100,000, this trade would constitute a risk of a whopping 14%! With such a large risk, stemming from the size of the account, any sensible trader would be wise to avoid this trade. Having to skip these types of opportunities is another penalty paid by the small managed futures account.
On top of this, a large managed futures account can use one of the easiest forms of risk control available: contract scaling. Let’s assume, for example, that a trader is trading a large account long fifty gold contracts during a large bull-market run and they want to cut their open trade profit exposure. To do this, they can scale out as many contracts as they need to lock in profit, all while maintaining their profitable position.
What can the small managed futures account do to scale out if the trader started with only one contract? Again, the small managed futures account does not enjoy the flexibility to control risk the same as the large managed futures account.
Now, despite all the negative points that I have summarized above, I still think smaller accounts have advantages over large accounts. Small accounts can trade markets that would be far too illiquid for large accounts. Most institutionally sized funds get confined to trading only financial and energy instruments. They miss trading opportunities in traditional physical commodity markets, especially commodities like grains, foods, and fibers. This limit creates a lack of diversification and an over-reliance on those few sectors in which the large accounts can trade.
Coincidentally, many small accounts experience the same problem. The reason is caused by them choosing to handle their small account problem by only trading in a few markets. Some confine their trading to one market, so they are missing one of the greatest advantages they have over the “big boys.”
Trading Systems from R Quant Systems LLC
R Quant Systems LLC tailors its strategy to those smaller traders who want the advantages of global diversification with the individually segregated, not pooled, account. R Quant Systems LLC is carving out a niche by offering Trading Systems that monitor and trade more than seventy diversified commodity markets while trading accounts as small as $30,000.
The intent of R Quant Systems LLC trading systems design is to keep drawdowns and volatility roughly the same with what has previously been available with a large, widely diversified account. This combination of trading many markets in a small account while keeping volatility in check is rare. It fills what we feel is a void in traditional futures trading offerings.
Although what we do is proprietary, the premise uses a form of relativity. R Quant’s trading systems monitor a large universe of tradable commodities for opportunities, yet are highly selective in what trades they will enter. For roughly every ten trading opportunities identified by R Quant‘s combination of trading systems, it enters about one. R Quant’s algorithms consider not only the direction of the market and its movement potential, but it also considers the market ranking after being risk-adjusted.
The idea is that evaluating an opportunity is done by comparing what else is available. For example, how will a trader know whether a 5% return is acceptable? For a wise trader, the sensible answer is that it depends on what else is available. In other words, the acceptability of a 5% return is calculated only based on the other relative choices available. R Quants strategy identifies those markets it thinks are the best and only considers those filtered markets should one of its many trading systems generate a signal.
The portfolio selection process is dynamic and gets rebalanced daily. From day-to-day, there are adjustments to the basket of markets that will get considered for trading. This rebalancing keeps R Quant’s trades confined to those markets offering the best risk-adjusted potential, and it allows them to evaluate a large portfolio while still keeping trades and margin requirements low.
Monitoring a large portfolio is essential. If traders are confining their trading to a predetermined small portfolio, how will they know that those markets will continue being the best markets? Hindsight-bias portfolio selection is a form of curve fitting and is a leading downfall of many traders.
If an opportunity develops in a market beyond a predetermined portfolio, any trader in his right mind would want to participate. By trading with R Quant’s trading systems, traders have the assurance that no market is arbitrarily ruled out. With R Quant’s trading systems, the likelihood that a portfolio is the product of hindsight or curve fitting gets cut.
The key to consistently doing these things is quantitative systems automating the process, and this automation is the linchpin of R Quant’s trading systems.
Commodity Trading carries risk and is not suitable for all investors. Past performance is not indicative of future performance.
By: Dean Hoffman
FUTURES TRADING IS NOT SUITABLE FOR EVERYONE AND PAST PERFORMANCE IS NOT NECESSARILY INDICATIVE OF FUTURE RESULTS. THERE IS RISK OF SUBSTANTIAL LOSS IN FUTURES TRADING OR WITH ANY TRADING SYSTEM OR PROGRAM. CAREFUL EVALUATION OF YOUR PERSONAL FINANCIAL SITUATION MUST BE DONE PRIOR TO DECIDING TO TRADE IN THE FUTURES MARKETS OR ANY GIVEN TRADING SYSTEM OR METHODOLOGY.
