Fees, fees everywhere… it can be hard for an investor just journeying into managed futures territory to know which ones are necessary, and which ones aren’t- especially with new products claiming to offer exposure to the asset class all the time. We decided it was time to set the record straight.
Now, let’s be clear. Whether it’s through Attain, a platform, or a mutual fund, there will be commission rates, CTA management fees, and incentive fees to consider. In other words, unless you’re some kind of trading prodigy who can do it all on their own (which we’d wager is .1% of the population or less), you’re going to pay some sort of fee to access the managed futures space. However, how much you end up paying is up to you.
The Dreaded Load Fee
While the terms “front end load” and “no load” are rather common in the mutual fund world, the terms have (thankfully) not been very pervasive among professional Commodity Trading Advisor (CTA) programs. This is a good thing, as any mention of the word “load” involves more cost for the investor. Unfortunately, the practice of charging an investor a front end load to participate in a¬†CTA¬†program is becoming more and more common.
For all you investors within ear shot -¬†DON’T FALL FOR IT -¬†DON’T PAY AN UPFRONT SALES FEE.
We have a few problems with paying an upfront fee:
- The investor usually invests based upon a¬†CTA¬†track record, but that track record does not include the upfront charge.
- The investor stands to make considerably less with the¬†CTA¬†program over the course of the investment.
- It’s not a requirement for participation in the CTA¬†program.
Load v. No-Load
A quick search on any mutual fund website will show categories of funds separated by load and no load. In fact, load funds usually don’t have any special qualifier, merely going by their names, while no-load funds tend to advertise the fact that they are such. What does all this mean?
Basically, with no load funds, every dollar you initially pay goes directly to the investment. Load funds, on the other hand, will charge you money to begin investing- typically between 2% and 8%. Usually, this fee is deducted from your initial investment, so a $1,000 investment paying a 5% upfront load would actually be paying $50 in expense right off the bat, and only investing $950. There are also back load and level load funds, but those have yet to rear their ugly heads in CTA territory, so we won‚Äôt confuse you with the details.
99% of all CTAs are “no-load,‚ÄĚ meaning they don’t charge an upfront fee. So where do loads and upfront fees come in for¬†CTA¬†investments? What we‚Äôve found is that brokerages are the ones instituting the fees. They simply will not advise the CTA to start trading until the fee has been paid. While, by law, the clients are informed of these fees and must agree to them, in many cases, they won‚Äôt know any better, especially if they‚Äôre new to managed futures and CTAs.
Three Issues with Upfront and Load Fees
1. Our first problem with charging an upfront fee is that the track record of the¬†CTA¬†investment is overstated for the investor who paid the upfront fee. Typically, investors make decisions about their investments based on the track record of the selected CTA. However, most of the time, you won‚Äôt find these upfront fees reflected in the CTAs performance.
We can hear your indignant cries a mile away, and completely agree. Performance should reflect the upfront fees, and regulations state that any such fee a¬†CTA¬†charges is reflected in their performance track record. But here’s the catch ‚Äď if it’s not the¬†CTA’s fee, but one charged by the brokerage, the¬†CTA¬†doesn’t have to include it in their track record. Because the brokerage firm isn’t managing the money - they don’t have to keep their own track record which reflects the fees either.
The National Futures Association sniffed this practice out in mid-2005, putting out an advisory that brokerage firms need to outline all fees an investor will pay in the form of a breakeven analysis which reflects the rate of return the customers must receive on the investment to break even in the first year. Still, the practice of not including these fees in the performance track record leaves far too much room for confusion, in our minds.
2. The breakeven analysis is all fine and good, but it still ignores the fact that the investor who pays an upfront fee will, by definition, under perform an investor who does not pay the fee. This is like lining up two identical sprinters in a race, but giving the one sprinter a 5 step head start. There’s no question who will win the race, and there’s no question the investor with a head start (no upfront load) will win the investing race against the investor paying the fee and starting out well behind.
Sales people who charge the fee may try and say that a small fee of under 5%, for example, won’t matter much over the course of a few years on an investment that may make 50% or more in a single year, but that argument forgets about the power of compounding returns.
The following graph shows the cumulative net profit of two fictitious investors in the Clarke Capital Global Basic program since its inception. The graphs assume both investors invested $250,000 into the program, but that the 2nd investor paid a 5% upfront load fee. This would have caused the second investor‚Äôs starting capital to be reduced by a mere $12,500. This may not seem like much compared to $250,000‚Ä¶ but then you look at the performance.
As the graphs demonstrate, the investor who paid the load fee winds up with substantially lower total returns as of today. They‚Äôre missing out on $112,756.65. We don‚Äôt know about you, but in our opinion, it sure would be nice to have an extra $112k just laying around somewhere‚Ä¶.
3. The final issue here is that¬†you don’t have to pay the fee. Of all the¬†CTA¬†programs known to Attain, none require the broker to charge an upfront fee. Further, all work with several different brokerage firms, meaning if one broker is demanding you pay the upfront fee, you can merely open the account at a brokerage firm like Attain, who doesn’t charge the fee.
This is different than in the mutual fund world, and even in the hedge fund world, where there are a lot of load funds in which that is the only choice. Either pay the fee or don’t invest. But in the case of CTAs where you can go to a firm like Attain and not pay the fee, there is no sense in paying an upfront fee when there‚Äôs no need.
New Ways to access Managed Futures = New Fees
Seems like everyone is rushing into the managed futures space these days, launching ‚Äúplatforms‚ÄĚ, public mutual funds, and privately offered funds allowing access to the Winton‚Äôs, Transtrend‚Äôs, and other big wigs of the industry. But along with these products come a whole slew of new fees to access managed futures.
Consider the following listing of fees we pulled from a few prospectuses we have looked at recently:
These fees add up in a hurry, with breakeven points for many of these products standing at 6% to 8% for the first year. We have already covered the problem with the load fee, which is just as pertinent in a fund product as it is elsewhere ‚Äď and want to spend a minute getting into some of these other fees.
First up, the platform fee.¬† Managed account platforms are a relatively new way to access managed futures, allowing well heeled investors relatively cheap access ($100K) to high profile managers with minimums in the 10s of millions. To accomplish this, the platforms essentially create a fund which opens an individually managed account with one of these managers¬†(with the opening dependant on getting enough investors aggregate capital to meet the minimum). To cover their costs of starting and operating the fund, these platforms charge a ‚Äėplatform fee‚Äô of between 0.30% and 1.50%.
Elsewhere, banks and brokerages may try and keep clients from going outside their brokerage to gain managed futures access by offering in house managed futures products (sometimes white labeled), which are essentially feeder funds into some of the top CTA‚Äôs own funds. For this access, they may again charge an up front load fee, and in addition, charge a management fee for running the feeder fund (even though it is only investing in another product), and/or an ongoing sales commission paid on the equity amount each year, and/or a ‚Äėplatform‚Äô fee for providing the access to the high minimum manager.
And finally, there are the managed futures mutual funds, which attempt to track managed futures either by following an indicator (we‚Äôve already aired our issues with these¬†here and¬†here), or by investing in (either directly or indirectly) individual CTA programs. The latter type look like the most expensive option for smaller investors ‚Äď with load fees, ongoing sales fees, and management fees all coming off of the top before an investor can get to the meat of the returns.
To get a better idea of how all these fees can impact¬†your bottom line, we took a look at the theoretical performance of a $100,000 investment with Winton Capital‚Äôs Diversified Program in 1997 to now. With all fees present, total returns were diminished to the tune of $400,000. We certainly could use an extra $400k- could you?
The bottom line? One, never pay an upfront fee. Two, if you are looking at getting managed futures exposure in your portfolio ‚Äď make sure you know that doing so through platforms, feeder funds, and the newer managed futures mutual funds are the more expensive way to do so, while accessing managers directly via an individually managed account at a firm like Attain is the most cost efficient way to do so (as long as you don‚Äôt pay an upfront fee in your individually managed account).
The funds will argue that you need millions of dollars (and 10s of millions in some cases) in order to replicate the exposure they can offer in their products (which is why and how the market bears them charging all of the extra fees), and they have a valid point there. They are charging for access not readily available to those without 7 or 8 zeroes at the end of their net worth number.
But for those who are sufficiently well-heeled‚Ä¶ paying the extra fees for access might not be the most cost efficient way to get managed futures exposure. For those who can afford it, individually managed accounts provide not just the transparency and liquidity usually associated with managed accounts¬†(which the newer products have admittedly done a great job replicating), but also the control they need and want - with a lower cost structure. It‚Äôs a win/win in our¬†biased opinion.
*Remember- the table above shows only ‚Äėadditional fees‚Äô. Standard commission rates, along with the CTA‚Äôs management and incentive fee apply, in ALL cases.
But we‚Äôre not the only ones who feel that way. We‚Äôll leave you with a comment we received from Corestates, LLC- one of the many advisors who work with Attain to access managed futures:
‚ÄúFor us, with a multi-manager CTA fund and clients with investable assets in the millions ‚Äď gaining managed futures access through individually managed accounts at Attain was the most cost effective way to get the exposure we wanted. We have used platforms in the past, and the technology, manager selection, and/or service did not justify the additional costs.‚ÄĚ
Chip Bromley, AIF, CAIA
Head of Alternative Investments
CoreStates Capital Advisors
Couldn‚Äôt have said it better ourselves.
Forex trading, commodity trading, managed futures, and other alternative investments are complex and carry a risk of substantial losses. As such, they are not suitable for all investors.
The entries on this blog are intended to further subscribers understanding, education, and ‚Äď at times- enjoyment of the world of alternative investments through managed futures, trading systems, and managed forex.¬† Unless distinctly noted otherwise, the data and graphs included herein are intended to be mere examples and exhibits of the topic discussed, are for educational and illustrative purposes only, and do not represent trading in actual accounts.
The mention of asset class performance is based on the noted source index (i.e. Newedge CTA Index, S&P 500 Index, etc.) , and investors should take care to understand that any index performance is for the constituents of that index only, and does not represent the entire universe of possible investments within that asset class. And further, that there can be limitations and biases to indices:¬† such as survivorship and self reporting biases, and instant history.
Managed Futures Disclaimer:
Past Performance is Not Necessarily Indicative of Future Results. The regulations of the CFTC require that prospective clients of a managed futures program (CTA) receive a disclosure document when they are solicited to enter into an agreement whereby the CTA will direct or guide the client‚Äôs commodity interest trading and that certain risk factors be highlighted. The disclosure document contains a complete description of the principal risk factors and each fee to be charged to your account by the CTA.