1. With a high regulatory bar for creating public pools, restrictions on trail
commissions and super high minimum investment levels for managed accounts,
few investors have access to managed futures. However, some brokers are
trying to bridge the gap by offering managed futures to retail.
Managed futures for all
MONEYMANAGED
M
anaged futures as an asset
class, to many, is a closely
held secret. Though the
likes of John W. Henry,
Millburn Ridgefield and Campbell and
Company have been around for several
decades with returns that hold up
against the more popular alternatives
and have offered retail access through
broker dealer networks, the vast major-
ity of managed futures programs are out
of the reach of ordinary investors.
There are only a handful of open
public commodity pools available to
the retail public and the vast universe
of commodity trading advisors (CTA)
all seem to require minimums of
$500,000 or more (see “Managers want
big money, right”). Perhaps the main
problem is that the terms futures and
investment have often been thought of
as mutually exclusive.
Because futures always have been
viewed as a highly speculative field,
whether you talk to an average Joe or a
Wall Street broker, they never have
gained mainstream attraction as a viable
asset class. Retail investors can pick
from thousands of long-only equity
based mutual funds and bond mutual
funds and even real-estate investments
trusts (REIT), but they are rarely pre-
sented with the managed futures option.
The way investments are offered to
the retail community involve “securi-
tizing” larger investments and offering
them in smaller chunks. While that is
efficiently done in long-only mutual
funds, in futures the regulatory hurdles
are multiplied, making the creation of
public pools cost prohibitive.
While the Managed Funds
Association has long sought freedom
from the yoke of dual regulation, any
entity seeking to create a public pool
faces a cost ten times greater than cre-
ating a mutual fund and the close
supervision of multiple regulators.
There is a large gap between the hand-
ful of retail public commodity pools
and the universe of 600 plus CTAs
who target institutional and high net-
worth clients. However, a group of
enterprising futures commission mer-
chants (FCM) are attempting to fill the
void by finding emerging CTAs who
accept smaller minimums and offer
managed accounts at a more reasonable
investment level.
Rick Gallwas has attempted to fill
that gap, first through his firm Zap
Futures and now as president of RJO
Futures, a division of R.J. O’Brien,
which purchased Zap. “Am I trying to
give people professional money man-
agers at a lower entry level than
$500,000? Yes, I am working with peo-
ple to grab this marketplace of emerg-
ing CTAs because, obviously, the peo-
ple taking $500,000 minimums and
B Y D A N I E L P . C O L L I N S
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2. Reproduction or use of the text or pictorial content in any manner without written permission is prohibited.
Copyright 2005 by Futures Magazine Group, 833 W. Jackson Blvd., 7th Floor, Chicago, IL 60607
managing $500 million started some-
where,” Gallwas says. He sees a great
desire for professionally managed
futures from people with between
$25,000 and $100,000 to invest. “On
the individual level you are trying to
give the retailer the chance to work
with professional money managers.”
Gallwas is not alone. FCMs
Peregrine Financial Group (PFG), Man
Futures and American National
Trading Corp. and several others all
have been working and developing
relationships with emerging CTAs to
offer to their clientele.
PFG has gone a step further by hold-
ing a CTA challenge that awards the
best performing emerging CTA with a
$500,000 allocation. The award is not
the goal, but a way to attract emerging
managers. Michael Killian, SVP at
PFG, says their clientele requires them
to think small. “Given the client pro-
file that PFG has, more retail oriented,
and clients that would invest in CTAs
or funds in the $10,000 to $100,000
range, we need to find emerging CTAs,
as their minimum requirement tends to
be in that $25,000 to $50,000 range,”
Killian says.
Michael Herron, national director of
brokerage services at American
National Trading Corp. (ANTC), is
two years into a program trying to bring
managed futures to the retail investor.
“We are looking for the mom and pop
investor; the whole idea is to bring Wall
Street to Main Street. The mom and
pop investor has not been aware of man-
aged for the last 30 years,” Herron says.
Perhaps the reason he cited Wall
Street, synonymous with stock trad-
ing, instead of LaSalle Street, synony-
mous with futures trading, is because
he has mirrored his strategy from ones
used in the equity world. “I morphed
the approach Merrill Lynch imple-
mented 15 years ago. They had their
own due diligence committee and
software designed to show if I blended
a top-down blue-chip growth manager
with a bottom-up approach blue-chip
manager and an allocation to an inter-
national stock and an allocation to a
small cap manager and an allocation
to a interest rate trader, here is what
the portfolio would have done over x
amount of years,” Herron says. He has
applied that methodology to a group
of CTAs. An investor will give
ANTC its profile including invest-
ment goals and risk tolerance and it
will create a portfolio.
“We blend managers together
according to the overall account size
and create a portfolio designed to
meet and exceed their performance
expectations and risk tolerance,”
Herron says. It is taking modern port-
folio theory down another level by
diversifying alternatives. “We grab
three of our managers out of the
11 we offer and put them together in
such a way that the total account
size is $100,000, it is an actual con-
www.futuresmag.com | August 2005 57
NOT A LOT OF CHOICES
Only a small portion of CTAs offer programs with minimums of $50,000 and below.
Source: Barclay Map
MANAGERS WANT BIG MONEY
CTA minimums greater than $1 million is the norm.
Source:Barclay Map
17%
83%
$10,000 and under
$60,000 – $80,000
$200,000 – $400,000
$15,000 – $25,000
$100,000
$500,000 – $900,000
$30,000 – $50,000
$125,000 – $150,000
$1 million and higher
5%
41%
4% 8%
15%
13%
11%
2%
1%
*Note: Several programs with minimums of $50,000 or below listed on the Barclay Map database are funds, so the percentage of
managed accounts at that level is less.
$50,000 and under $ above $50,000

3. glomerate of three to four managed
accounts and we tally it up on our
equity runs and show the performance
over the course of a month on a daily
basis,” Herron says.
FAMILY OF MANAGED ACCOUNTS
Offering diversification is a major
problem for these programs. Most sys-
tems, even if robust, work best when
applied to a diverse group of sectors
and futures contracts. Having higher
minimum investment levels is not just
a residue of success and attracting high
net worth investors’, it is a necessity if
a manager is applying his methodology
to a diverse group of markets in
a managed account format. Each
account must receive an allocation for
each market traded so the more mar-
kets traded necessitates a higher mini-
mum investment level.
That is why the group of managers
offering managed accounts at lower
minimums tend to be the niche manag-
er who are applying their methodology
to only one market or one market
sector. While many of these managers
are successful, the program is not diver-
sified and a prudent investor needs to
spread his alternative investment dollar
to several of these managers.
“What an investor says is ‘I want to
put in $100,000 but I don’t think I
want to put it with just one CTA,
can I invest in two or three CTAs?’
We present to them a portfolio that
shows [a $100,000 allocation to]
three CTAs; here would have been
their performance over the last year
or so if you had given a third to
each,” Killian says. “We also would
have shown you, hopefully, that
these three CTAs are not correlated
to each other. That gives additional
comfort. We think that gives extra
value to a client’s investment.”
This is important because diversi-
fied managers, those trading between
25 and 75 markets, necessarily have
higher minimums. The vast majority
of CTAs in the $25,000 to $50,000
range are niche managers. But one can
combine an equity index program, a
forex program and an agricultural pro-
gram together and get a pretty well-
diversified strategy.
That is precisely what many FCM
programs are attempting. While not as
efficient as creating a public pool, it has
the benefit of not adding a layer of fees
and keeping the added transparency
and liquidity of managed accounts.
This is what Gallwas set out for
Managed Money continued
58 FUTURES | August 2005
PORTFOLIO BUILDER
Brokers can hook you up with a stable of managers by matching your investment needs
and risk tolerance with the appropriate CTAs.
Source:

4. when developing his portfolio optimiz-
er strategy for Zap with a group of Uni-
versity of Chicago graduate stu-dents
and is now utilizing it with RJO Fu-
tures. “Click on it, answer a few ques-
tions and you will have a portfolio de-
veloped for you and you will be able to
call and talk to one of our represen-
tatives who will tell you which prod-uct
we recommend for you,” Gallwas says,
(see “Portfolio builder,” left).
You input your risk parameters and
the equity you have to risk and it gives
recommendations for managers with
the proper allocation to each.
The problem is accessing the man-
agers. The vast majority of managers
require higher minimums than the retail
investor can afford (see, “Not a lot of
choices,” page 59). Once you parse
through the small number of CTAs with
smaller minimums and eliminate man-
agers with undesirable performance and
risk characteristics, you have a very
small number. “The weakest part of the
equation is [the number of] products to
support it. I would really like to have
12 to 18 solid across-the-board differ-
ent market CTAs on my Web site,”
Gallwas says, adding there is a partic-
ular need for energy sector managers.
“I can’t tell you how many people have
come in and said ‘do you have anyone
who is heavy in the energies? ’” Gall-
was adds.
Most of these programs operate with-
out adding any additional cost than if
the investor accessed the CTA directly.
They can do that because they are reap-
ing the brokerage benefits. Even those
that allow their introducing bro-ker
networks to participate says the end
user typically is charged no more that a
$15 roundturn fee, along with the CTAs
typical 2% management fee and 20%
incentive fee.
Herron was an introducing broker
(IB) for FCM Vision prior to develop-
ing ANTC’s program. Vision, to some
degree, pioneered this approach but
employs a structure that allows their
affiliated IBs to charge high front load
and management fees (see “How much
are you paying?” January 2005). While
Vision offers several CTAs with im-
pressive performance, the added fees on
the front-end create a large hurdle for a
manager’s performance to overcome.
“IBs ask ‘why should I sell yours
when other FCMs are going to pay me
out three times the amount?’ The real-
ity is all those payments get taken out
of the client’s performance and at the
end of the day you have an unhappy
client and you have done nothing more
than move money from one side of the
ledger to the next without [looking at]
the client’s best interest,” Herron says.
ANTC has adopted the use of a load
fee, which is rare for CTA programs
but common in securities. Herron con-
tends the overall fee structure of the
securities side is lower. “My focus has
been more intended for a securities bro-
ker and or financial planner who is used
to getting paid 1% a year and if you are
going to pay them out 2% or 3%, they
are thrilled,” Herron says. That is de-
batable. Gallwas says, “The fees on the
securities side make us look good, we
make our money when the product
makes money.”
The cost of offering products with
lower minimums may justify an addi-
tional fee, especially if a broker is cre-
ating a diversified portfolio, but man-
aged accounts can and should be ac-
cessed with either no or very little addi-
tional cost to the CTA management and
incentive fee.
If there is a question about fees it is
prudent to ask for a breakeven analysis
telling you how well a manager needs
to do in order for your investment to
break even. Anything above 10% is
very high. Some managers who do not
charge management fees and utilize
strong cash management achieve a zero
breakeven. When it comes to fees it is
encouraging for managers and the bro-
kers who market them to have the con-
fidence and patience to wait to be paid
through incentive fees.
FM
There is a substantial risk of loss trading commodity futures and options. Before investing, please under-
stand that changes in the cash and commodity futures price do not typically correlate on a one to one ratio
with the corresponding commodity option price. Moreover, past trends in cash and futures prices on spe-
cific commodities do not necessarily forecast current profitability of options on those commodity futures.
All known market news will not necessarily affect option prices since the news is usually already factored
into the underlying futures price, as well as option value.