Start a Futures Fund All you need to know about Comodity Trading Advisors & Comodity Pool Operators

Questions and Answers

What are futures funds?

Futures funds use a strategy that involves futures contracts to achieve absolute returns.  Futures are a kind of derivative that are essentially contracts to buy an underlying  asset at a specified price and date.  They are different from options as futures are an obligation to buy, while options give the investor the option to.  Since futures can have underlying assets that range from physical commodities to financial instruments, they are less correlated with the stock market.  This gives investors an opportunity to diversify their portfolio, thus reducing systematic risk, also known as market risk.

What kind of returns can I expect from a futures fund?

Futures are inherently volatile, even more so than stocks or bonds.  There are also many different factors that can affect the prices, such as weather, foreign economies, or simply incorrect predictions.   While futures give investors an alternative opportunity to diversify and pursue their investment goals, many choose to invest their monies with an experienced manager.  A manager's knowledge, resources, and experience are crucial in succeeding in futures investments.    Managers can utilize futures as a strategy to achieve returns that may not be available from traditional assets.  Futures funds usually focus on carefully selected classes of assets and apply strategies that they believe will produce exceptional returns. Strategies vary, but often combine asset classes such as agriculture products, energy products, equities, metals, and currencies. 

   
What is the difference between managed futures and futures funds?

Two common ways that investors benefit from investing in futures are managed futures accounts and futures funds.  With managed accounts, each investor usually has a separate account, while futures funds allow many investors to contribute to one fund.  One of the advantages to futures funds is that management's resources and energy can be focused on the performance of one large fund instead of many smaller ones.

How are futures funds structured?

Typically, they are set up similar to how a hedge fund is set up.  Managers typically set up limited partnerships and pool funds from accredited investors, charging management and incentive fees in addition to the commission earned on returns.  The main difference is that futures funds usually have to register with the NFA.  Hedge Legal and Compliance Team can guide you through the registration process efficiently.

What are some of the requirements for fund managers?

Managers usually have at least their series 3 license, Charter Financial Analyst (CFA) designation, and a qualified broker.  They do not have to register as an investment company, but a private placement memorandum (PPM) should be created, as well as other documents such as subscription and operating agreements.  A PPM is generally an overview of the fund that includes information on the fund's management and general strategies to give investors information about the fund.

What states require futures funds registration?

Registration requirements vary from state to state, but generally managers must file with their state or SEC if between $25 million and $30 million is being managed.  If more than $30 million is being managed the manager must register with the SEC as an investment adviser.  The funds may also be regulated by the Commodity Futures Trading commission (CFTC) and the selfregulatory National Futures Association (NFA).

How can one raise capital for futures funds?

Start-up capital is crucial for futures funds.  Besides registration fees and administrative and legal cost, futures funds must also attract a significant amount of capital from investors. Managers generally invest a significant of their own money in to the fund, which aligns their interest with the investors.  HedgeCo can also provide capital introductions.