“A Gold Rush in Managed Future Mutual Funds?” – What CTAs and Commodity Pool Operators need to know

Ask the average private client financial advisor what they know about Commodity Trading Advisors or Commodity Pool Operators and odds are – you will draw a blank. This is why it is nothing short of amazing that Altegris Investments, a well-regarded CTA/CPO, was able raise over $1 Billion in retail assets under management in a little over a year with a product designed specifically for retail distribution. How did they do it? They launched an actively managed, Managed Futures '40-Act' Mutual Fund.

We believe that the advent of Managed Futures mutual funds may represent a watershed moment for the CTA industry. If you consider that the mutual fund industry represents over $12 Trillion in investible assets¹. Mutual fund investors have the potential to become the single biggest source of new assets for Commodity Trading Advisors and Pool Operators over the next decade.

For investors, the benefits are numerous - dramatically lower minimums, daily liquidity, no subscription paperwork and the scale of a pooled vehicle. And private client financial advisors increasingly understand the diversification value that managed futures strategies can add to their client's portfolios.

Fortunately, their options for investing in these Managed Futures Mutual Funds have been growing. Since 2010, AQR and Natixis each came out with Single Manager Mutual Funds which have raised close to $2.5B; while Princeton and Equinox each launched multi-fund Mutual Funds which have garnered over $1.3B. In aggregate, over $8.5 Billion has been raised by funds in this category, and the pipeline of new offerings remains robust. So, one might ask the obvious question:

Is it too late for this opportunity?

We would argue no. Alternatives are gaining traction with retail investors at an increasing rate. To get a sense of the market potential – consider that the research committees at the major wire houses have added allocations to alternatives as part of their core asset allocation models that range from 10- 20% with an average of 5-10% allocated specifically to managed futures. Given this, and assuming these products are able to develop a reasonable track record, a conservative estimate of 1% to 2% of mutual fund assets, or $120 - $240B in potential new funds, would not be unreasonable. For context, the CTA industry has reported a total of $314.6B in AUM after 30 years (according to Barclayhedge³) - this opportunity should not be ignored. 

We have worked with several of our CTA clients to develop managed futures funds and understand the trends as well as potential challenges associated with this quickly evolving market. If you are a Commodity Trading Advisor or Commodity Pool Operator and would like to discuss how this trend may apply to your business – please feel free to contact us today.

Additional resources:

Managed Futures Funds: LPs vs. Mutual Funds

Proposed CFTC/SEC "Harmonization Rules"

http://www.managedfuturestodaymag.com/managed-futures-mutual-funds-expand-investment-options

http://seekingalpha.com/article/312307-managed-futures-and-commodities-overview-and-outlook-for-2012

¹ Year-end 2010 Mutual Fund Holdings; Trends in Mutual Fund Investing, Jan 2012
² Morningstar Portfolio Manager – Managed Futures Fund Category
3 BarclayHedge; CTA Industry Assets Under Management