Handbook of Hedge Funds

16

Managed Futures and Commodity Trading Advisors (CTAs)

Is it better to make little money most of the time, or to make a lot of money once in a lifetime?

Futures contracts and markets have been in existence for several centuries in one form or another – their origins can be supposedly traced to Ancient Greek or Phoenician times. However, futures trading on a formal futures exchange only originated in the US with the formation of the Chicago Board of Trade (CBOT) in the middle of the nineteenth century. The CBOT primarily attracted two categories of futures participants: hedgers and speculators. The former used futures contracts to hedge against future price variations in the underlying cash commodities, while the latter had the sole intention of making money and realizing capital gains by correctly forecasting future price variations.

In the early 1970s, as a result of the regulatory separation between the brokerage and investment management functions of the futures business, a third category emerged. It regrouped a few professional money managers that were using futures contracts as investment vehicles on behalf of their clients. At that time, futures contracts existed only for a few commodities. Hence, these new money managers were often referred to as Commodity Trading Advisors (CTAs), and their funds took the name of managed futures. Their success in raising assets was rather limited, primarily due to the fact that most investors were not yet familiar with the opportunities ...