Commodity Futures Trading Blog

Futures trading offers speculators the opportunity to use enormous leverage. For example, a standard size soybean contract is 5000 bushels of soybeans. At $10 a bushel, this represents roughly $50,000 of soybeans, but the margin required to control that contract may only be a few thousand dollars.

So, a movement of just a few percent in price of the underlying commodity could equal hundreds of percent movement in the value of the initial margin deposit. It is this extremely high margin that has led commodity futures trading to having a reputation as being a place for gamblers.

However, despite commodities gambling reputation there’s a perfect economic justification for its existence. Commodity trading allows hedgers the opportunity to offset price risk. Hedgers include people such as farmers, food manufacturers, oil refiners or anyone who commercially deals in the physical commodities market. What a hedger can do with commodity futures trading is lock in the price they are able to purchase or sell a commodity for at a future date.

For example, a farmer recognizes that, at current prices, he can make a sizeable profit from his corn crop; but he will not harvest it for another 60 days. His risk is that prices drop between now and crop time. So, he can sell his un-harvested crop today in the commodity futures market at current prices. This way should prices drop he has already locked in his profit.

The speculator, on the other hand, the person that assumed the risk is gambling that prices will go even higher, and he too can potentially make a profit by selling at even higher future prices (or lose money if prices drop). The farmer is happy as he was able to secure his profit, and the speculator is happy as he gets the opportunity to assume the farmers risk with the potential for profit.

Such futures trading leads to price stabilization in the marketplace. Without such risk transference mechanisms in place, consumers would be subjected to wild swings in commodity costs. Imagine if every time a shopper went to the supermarket their bill varied by 20-30 percent for the same groceries! This would also be the situation in countless other industries that use commodities. The bottom line is that regardless of its betting reputation, commodity futures trading serves a vital role in today’s economy.

For more information on our futures trading system Relativity, please contact us.

Commodity trading carries risks and is not suitable for all investors. Past performance is not indicative of future results.

DH Trading Systems

TAGS: Futures Trading

We have talked about the dangers of optimizing a trading system (forcing a trading system to conform to historical data), but, one of the subtler forms of optimization happens with portfolio selection. This happens when trading systems are only shown tested across a handful or a small number of markets (or sometimes just one market).

The problem is that what is usually done is that most all the available markets get tested, and then only those that performed the best get shown in the portfolio. This is an enormous mistake, because the markets that performed best historically are rarely the ones that continue to be the best. What traders end up with is something that only worked well historically.

To avoid this tendency, we believe that the most robust way to see a system test is across ALL the available markets. Some will argue that different markets should be traded different ways, and to that we say NONSENSE. Markets are always changing, and a market that traded like market XYZ today will trade like market ZYX tomorrow. Unless a trading system is robust enough to trade every market, it is likely a useless curve fit of the data.

For us in the commodities markets, we use roughly 80 markets. There are over 100 commodity contracts that trade, but we do limit the selection to those that are liquid enough (have enough trading volume) to trade.

Testing this way does cause one problem. The problem is that traders can be trading many markets in the same sector at a given time. Investors will need to have some sector risk control mechanisms in place. We like to be certain that the risk in a given sector does not exceed about 5% of the account equity.

If someone creates a system that can successfully trade nearly EVERY commodity market and uses the same rules for each market and gets tested over a long period, he may be on to something. Just remember, the next time someone shows the results of a backtest ask him “How many markets does this test include?” If the answer (for commodities) is less than about 70 or 80, then be suspicious that this may be curve fit results. Once again, curve fitting tends to produce systems that ONLY perform well historically.

We test all the systems we make available across nearly every tradeable commodity market. We could easily improve performance (historically) by only cherry picking the best markets, but we know this is misleading data.

For more information about Trading Systems feel free to contact us.

Commodity trading carries risks and is not suitable for all investors. Past performance is not indicative of future performance.

TAGS: Trading System, Trading Systems

Over the last seven years, investment in professionally managed futures accounts has more than quintupled. According to hedge fund tracking firm Barclays, assets under management rose from approximately 41 billion dollars in 2001, to more than 219 billion dollars today! This is a trend that we expect to see continue, not only as the demand for commodities continues to rise on an international level, but also as more investors, individual and institutional, start to see commodities as a sensible investment vehicle.

This steady growth has also raised the need for greater discretion in selecting a Commodity Trading Advisor. In this article, we will outline what we believe are some of the best tools and methods available to the individual investor when choosing a managed futures product.

Let’s first define what managed futures are and what they are not. Managed futures are not merely stocks or ETFs that invest in commodities. Managed futures accounts are investments in which the funds invest mainly in leveraged, future dated contracts for either commodities or financial instruments. Commodities may include sectors such as food, energy, and raw materials, and financial instruments may include interest rates and stock indexes. The leverage of these investments means that risks and rewards can be, but are not always, substantially higher when investing in futures markets than when investing in the stock market.

The National Futures Association and the Commodity Futures Trading Commission handles regulation of managed futures investments in the United States, unless, the firm or fund has exempt status. Regulated firms hold either a Commodity Trading Advisor license (CTA license) or a Commodity Pool Operators license (CPO license). Keep in mind, however, that just that a firm carries a license is in no way an endorsement of that firm’s future performance. Because futures’ trading has the potential to come with large risks, it is not cut out for just any investor. Investors should be familiar with all the risks involved before investing.

Finding lists of potential managers to sort through can be a fairly easy task for an investor if he knows where to look. Firms such as Barclays Trading Group, Stark Research, Autumn Gold, and Altegris Investments have large databases of manager information available. One resource we personally like can be found at www.autumngold.com. Autumn Gold offers a free summarized online database of over 450 programs. Although their site requires registration, the programs are of excellent quality and may be sorted by a wide range of parameters including minimum account size, funds under management, and various other measurements of performance.

The only problem we see with online databases is that it can become somewhat overwhelming to try to narrow down so many choices. To help simplify the process, in part two of this series we will share what we think are some of the all around best performance metrics.

Commodity trading carries risks and is not suitable for all investors. Past performance is not indicative of future results.

Over the last seven years, investment in professionally managed futures accounts has more than quintupled. According to hedge fund tracking firm Barclays, assets under management rose from approximately 41 billion dollars in 2001, to more than 219 billion dollars today! This is a trend that we expect to see continue, not only as the demand for commodities continues to rise on an international level, but also as more investors, individual and institutional, start to see commodities as a sensible investment vehicle.

This steady growth has also raised the need for greater discretion in selecting a Commodity Trading Advisor. In this article, we will outline what we believe are some of the best tools and methods available to the individual investor when choosing a managed futures product.

Let’s first define what managed futures are and what they are not. Managed futures are not merely stocks or ETFs that invest in commodities. Managed futures accounts are investments in which the funds invest mainly in leveraged, future dated contracts for either commodities or financial instruments. Commodities may include sectors such as food, energy, and raw materials, and financial instruments may include interest rates and stock indexes. The leverage of these investments means that risks and rewards can be, but are not always, substantially higher when investing in futures markets than when investing in the stock market.

The National Futures Association and the Commodity Futures Trading Commission handles regulation of managed futures investments in the United States, unless, the firm or fund has exempt status. Regulated firms hold either a Commodity Trading Advisors license (CTA license) or a Commodity Pool Operators license (CPO license). Keep in mind, however, that just that a firm carries a license is in no way an endorsement of that firm’s future performance. Because futures’ trading has the potential to come with large risks, it is not cut out for just any investor. Investors should be familiar with all the risks involved before investing.

Finding lists of potential managers to sort through can be a fairly easy task for an investor if he knows where to look. Firms such as Barclays Trading Group, Stark Research, Autumn Gold, and Altegris Investments have large databases of manager information available. One resource we personally like can be found at www.autumngold.com. Autumn Gold offers a free summarized online database of over 450 programs. Although their site requires registration, the programs are of excellent quality and may be sorted by a wide range of parameters including minimum account size, funds under management, and various other measurements of performance.

The only problem we see with online databases is that it can become somewhat overwhelming to try to narrow down so many choices. To help simplify the process, in part two of this series we will share what we think are some of the all around best performance metrics.

Sincerely,Dean Hoffman

Commodity trading carries risks and is not suitable for all investors. Past performance is not indicative of future results.

Managed Futures and Emerging Commodity Trading Advisors

When considering managed futures, one possibility that must be considered is the emerging Commodity Trading Advisor. An emerging Commodity Trading Advisor is one whose track record is less than five years long and has less than $100 million dollars under management. Although it is often most comfortable to invest with a Commodity Trading Advisor that possesses a long and successful track record and has hundreds of millions of dollars under management, there can be real benefits to investing with an emerging Commodity Trading Advisor.

Investing in managed futures with emerging Commodity Trading Advisors can have benefits such as better risk adjusted returns. This is attributable to the fact that emerging Commodity Trading Advisors are not weighed down by their size. Specifically, emerging Commodity Trading Advisors can move into and out of markets easier and are able to trade markets that are not liquid enough for large Commodity Trading Advisors. My research has clearly shown me that being able to trade more markets is a tremendous benefit. Large Commodity Trading Advisors find themselves confined to only trading markets such as financial instruments, energies and metals. They end up missing out on opportunities in many other traditional commodity sectors such as grains like soybeans, corn and wheat and foods such as coffee, sugar, cocoa, cattle, pork and fibers like cotton. Once again, missing out on these markets can come at a great price.  

An added benefit with emerging Commodity Trading Advisors includes smaller minimum account sizes. For example, one up and coming CTA will trade a diversified portfolio of over 70 markets with a minimum account size of only $125,000. This is in contrast to more established Commodity Trading Advisors; they usually have minimums of $1,000,000 or more..  

In summary, when investors combine the benefits of potentially better performance and smaller minimum account sizes they can see that managed futures with the emerging Commodity Trading Advisor can represent the ideal solution for many investors.  

Commodity trading carries substantial risks and is not suitable for everyone. Past results are not necessarily indicative of future results

Many individual and institutional investors search for alternative investment opportunities when there’s a disappointing outlook for U.S. Equity markets.

As financiers try to diversify into different asset sectors, mostly hedge funds, many are turning to managed futures as a solution. But instructional material on this alternative investment vehicle is not yet easy to find.

So here we offer a helpful ( kind of due diligence ) primer on the topic, getting investors started with asking the most relevant questions. The term “managed futures” is about a 30-year-old industry made from pro money managers called “Commodity Trading Advisors” ( CTAs ). CTAs must register with the U.S. Government’s Commodity Futures Trading Commission ( CFTC ) before they can offer themselves to the general public as money managers. CTAs also need to go thru an FBI deep background check, and supply comprehensive notification documents ( and independent audits of finance statements each year ), which the National Futures Association ( NFA ), a self-regulatory watchdog organization reviews.

CTAs often manage their customer’s assets employing an exclusive trading program or a discretionary strategy, which will involve going long or short in futures contracts in areas like metals, grains, equity indexes, soft commodities and foreign currency and U.S bond futures. During the past few years, cash invested in managed futures has more than doubled and will likely keep growing in the approaching years if hedge funds returns flatten and stocks underperform.

A key debate for expanding into managed futures is their potential to lower portfolio risk.

Supporting such a discussion are many educational studies of the results of mixing standard asset groups with alternative investments like managed futures. Dr John Lintner of Harvard University is maybe the most cited for his research in this area. Taken like an alternative investment class alone, the managed futures class has produced comparable returns in the decade before 2005. As an example, between 1993 and 2002, managed futures had a compound average yearly return of 6.9%, while for U.S. Stocks ( based mostly on the SP 500 total return index ) the return was 9.3% and 9.5% for U.S. Treasury bonds ( based mainly on the Lehman Bros long term Treasury bond index ). Re risk-adjusted returns, managed futures had the smaller drawdown ( a term CTAs use to refer to the maximum peak-to-valley drop in a shares ‘ performance history ) among the 3 groups between Jan 1980 and May 2003. In this period managed futures had a -15.7% maximum drawdown while the Nasdaq had one of -75% and the SP 500 stock index had one of -44.7%.

A further advantage of managed futures includes cutting risk thru portfolio diversification by negative relationship between asset groups. As an asset sector, managed futures programs are inversely related with bond certificates and stocks. For instance, during times of inflationary pressure, making an investment in managed futures programs that track the metals markets ( like silver and gold ) or foreign currency futures can supply a valuable hedge to the damage such an environment can have on stocks and bonds. To explain, if bonds and stocks underperform because of rising inflation concerns, some managed futures programs might outperform in these same market conditions. So, mixing managed futures with these other asset groups may get the most out of your allocation of investing capital.

Commodity trading carries risks and is not suitable for all investors. Past performance is not indicative of future performance.