127: Nell Sloane – Becoming a CTA—How to Begin Managing Money

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Welcome everybody. Hope you are doing fantastic. Aaron Firefield here, and featuring on this episode is Neil Sloan. Though not a trader herself, Nil has been in and around markets and exchanges for roughly thirty years, mostly working in roles that assisted commodity traders and brokers in one way or another. Uh and since two thousand and six, Nil has been the principal of Capital Trading Group, a Chicago investment firm which she co-founded with Patrick Lafferty.

And this is the reason why I asked Neil to come on the podcast because The role of CTG or Capital Trading Group is to support traders who wish to expand their operation by managing money for others as a CTA business. Now CTA of course is the abbreviation for commodity trading advisor. CTG do also offer services to professional and individual investors.

to help them navigate managed futures. But for this episode we focus on what does it mean to be a CTA, the incentives to become a CTA and where to begin. fee structures, the requirements and regulations, how to attract capital from investors and other related subjects. I think this episode will be really helpful to some and to others it might be it might simply be interesting. Either way, I hope you get something out of this. Please welcome my guest, Neil Sloane.

Now, from what I know about you, you entered the field of trading around about thirty years ago. How did this happen and and where did you start out? Well, thirty years ago the world was different than what it is today. So I was uh right place, right time, right work ethics. I would always be, shall I say, babysitting the family of the wealthy. So I was fortunate w growing up in the Gold Coast of Chicago.

babysitting for um very well off families, one of which who was a uh a reputable stockbroker at the time. I was inspired and intrigued by what he was doing. So at a very young age of say sixteen, I wanted to learn more because I was fascinated by all the books and so forth he had in his house and so forth. So from there I got a position at a commodity firm.

And, you know, CTAs were not commodity trading advisors or managed futures was not as pronounced back then as it is today. But I would I would serve the brokers, I would provide a lot of the admin work and checking out trades and so forth, because we had open outcry back then and I would chart manually with the high and the low and the close and the opening on on a chart book that was called Commodity Perspective. I'm really aging myself here. But um

Everything was done manually and I just loved the business. It was exciting. It was your learning every day. It was not a typical nine to five job. It was invigorating. 'Cause you're learning constantly. And I love the markets. So I wasn't a trader, but I was more one who was involved in the service capacity of of providing those that did trade, removing less of their to do responsibility so they could just focus on the markets. Ok, and how long did you do that for?

Oh geeze. Many years. I mean, I didn't uh become a business owner of a brokerage firm until approximately oh six. So I always served, you know, really what I consider to be pretty good brokers. They were they were in the industry for a long time and they found it advantageous to have somebody handle all the admin work for them and serve clients so that they could focus on the trading.

So I mean that kinda makes sense why you started a capital trading group then. When did you found this company? NO six. Okay. NO six. Right now we'll I'd really like to talk to you about

the CTA landscape, what it means to be a CTA and sort of everything that surrounds it. So let's just start with the very basics. What is a CTA? It stands for commodity trading advisor. So it's somebody who's willing to handle the professional aspect of managing outside money. So they fall under the regulatory environment. Uh they're mu much more scrutinized on what they're doing and how they're doing it.

and how they market themselves and so forth. But it's when people want to take it to the next level. Okay, so what's the difference between a CTA and a hedge fund? Primarily it has to do with regulation. Uh hedge funds are lightly regulated. Commodity trading advisors are not.

While there are different elements of how regulated they might be, for example If you are a commodity trading advisor and you want to narrow in on who your clients will be based on suitability and you want your clients to be what's called QEP. They have to have a much higher net worth, not necessarily risk appetite, but just have to be much more financially qualified.

to participate. So they have regulations certainly that needs to be attended to, but not to the same degree as somebody who's taking clients that are not accredited or not QEP, there's a much greater degree of cost and oversight. when you are handling clients that are categorized more in the retail sector, so to speak.

So why would someone want to start a CTA over a hedge fund, whereas a hedge fund is is less regulated? Wouldn't that be more appealing for a a trader to start a hedge fund rather than a CTA? I think it depends on the audience that you're targeting. You know, a a lot of times hedge funds terminology is is the markets that they're trading outside of just the regulatory part of it.

So if they want to start a CTA, they first have to define their style of trading, what they're doing, and how much uh they need under management for each individual investor to meet the risk adjusted returns that they may be targeting. that alone will probably dictate the type of client that they're targeting. So if they're already targeting a higher end investor anyway, they can pick, you know, based on that alone what they need to do within the regulatory guidelines.

And also who who's gonna be raising the money for'em, what their distribution arm is should also dictate the direction that they want to take. Are the fee structures somewhat similar between CTAs and hedge funds, like it's commonly known that hedge funds charge their two and twenty. Is that quite similar in the CTA space also? Yes, it is. Although I will say that what we're experiencing, of course, is fee compression. I think investors are demanding more for less.

They want to be able to tap into the talent of traders, but they're also dealing in a very highly competitive environment. And while the cost of trading in terms of electronic trading over open outcry uh has been complementary on the CTA space. The traders themselves are still paying for for quotes which you don't really have in the security space.

So I I think what you're gonna see over the next and it's probably gonna evolve sooner than that in the next three years, I think you're gonna see the fee um compression go down even further and maybe possibly even see a one percent one in fifteen uh might be the average than two in twenty today. And how do you think that's gonna affect CTAs themselves? Like does that potentially mean this is going to become less lucrative for them?

I think they have to approach it in a more serious fashion than just thinking that they have great returns and investors will will follow. I think investors have to find you. I think you have to have an infrastructure. I think you have to be able to, like any business be able to stand the test of time with a lower fee model, entice people to want to do business with you because you have your own skin in the game but are also willing to charge less.

maybe below the average to capture more. It's just it's the world we're in today. Same thing with mutual funds and why the ETF space has been so is strong because it's so attractive on the fee component. But then again you're talking about tactical strategies versus, you know, passive anyway.

So when you talk about, you know, in the next three years it's possible that we might see some CTAs charging one and fifteen. Do you think that, you know, maybe in the next ten years that trend's gonna continue and fees are gonna come down even lower? Well there's there's a point where it's no longer viable when you when you take away, you know, the profitability. I guess case in point is like the the Futures Commission merchants once depended pretty heavily on

interest or as they call them, the float on the assets of customer seg money. Um it was a big profit margin for those firms and as you know, interest rates have been nearly flat for many years. As a result, they're no longer as profitable. So what one has to look at is recognize that the the path to least resistance right now. has been on the clients' fronts. They're demanding more for less and you have to be willing to

Give more for less and and do more. And then at that point, what can you do to cover your cost as far as finding firms like our firm? that might be willing to provide the infrastructure that they're lacking. So they're not just a a single man or a single woman shop and trading. But I think it's it's the path. I think that's where they're going. Yeah. I mean that'll be interesting to see how that plays out and affects things.

Are there various types of CTAs? Can you talk to us a little bit about that? The majority of the commodity trading advisory space is comprised of trend following strategists. So you have various styles of trading, various markets traded, various risk adjusted returns and various requirements on the type of investors that they're seeking that they want to manage assets for.

So we all have a different risk appetite. We all have a different financial obligation to family or Whatever the case may be, investors have to know themselves enough to know, well, I'm willing to risk, say, a hundred thousand in a in a portfolio that might have two million dollars in it, but I'm only gonna give a hundred thousand to a CTA. in efforts to hopefully smooth out my volatility in my portfolio.

So the there's there's many choices and it our our role will be to better understand the investor to match them with choices that they have and there's thousands of choices, but then when you narrow down what the investors are seeking, You know, you you might be left with a handful of traders, but you have trend traders, you have macro gl you know, global macro traders, you have um option strategist, option premium writers. Uh you have spread traders, seasonal traders.

Majority though have been trends and and the new emerging managers are coming out with more unique styles, which is attractive too, because the environment's been very challenging. Right. So let's dig into that a little further. I've got a few questions around this. So why are trend following strategies like the dominant strategy amongst CTAs? Like why is that so popular?

It's probably pronounced because when the CTA space became more acquainted with managing outside money to the level that being a CTA is, it could be starting back from if you've ever heard of the turtles. Richard Dennis. was one of the founders of a program where he would have a want ad in the paper, so to speak, looking for traders.

that he could teach and educate and then give them X amount of dollars in which they could manage assets. And from there the managed future space kinda took off. Not to say that there weren't other registered entities that were managing outside money, but I think The turtles kind of put that on the wall, so to speak. and trend trading was just more systematic. We had

more the core commodities that people could trade, the meats and the grains. I mean you know, earlier on we didn't have all the different uh components that we have now on which to trade. you know, S P five hundred, the bonds and so forth as the financials uh became uh and opened up the window just opened up more to various ways in which to trade. But trend trading was just something that many found it easier to comprehend. And then I wanna say the last probably ten years.

options. As you know, options didn't come around until the latter part of the eighties and they were so much more complex for people to understand. So only into the last, I wanna say, ten years. Uh did we see more um strategies surrounding options on futures contracts? Okay. So just so I understand this uh correctly.

Traders who operate on a very short time frame, so perhaps even intraday traders, day traders There's nothing stopping them from becoming CTAs, like there are investors out there who are looking for CTAs who trade those very active sort of strategies also. If people are managing their own assets and they feel that they have the capacity to to manage outside money as well, professionally speaking.

and you know, to establish a business front in which to do so, they can do so. They could go short term, they could go long term. It's at the end of the day, it's about being able to generate alpha. It's about being able to generate um and justify the risks associated with the potential to make money on what they're doing. And why would investors want to you know give you the discretionary authority to manage their assets? Then you want to be able to prove credibility.

And while the past doesn't necessarily dictate the future, you usually want to have your own skin in the game and you have your own method in which to control that risk. So that people might uh be confident and comfortable in what you're doing for yourself, they might be willing to let you do for them.

Now just going back to when we were talking about the trend following strategies, I think you said uh options uh trading strategies were becoming more increasingly popular in the in the CTA space. Do you think trend following strategies are gonna become less popular in the CTA space also. Well I don't think it's I think people are seeking ways to make money and and while I'm not a trader myself, this so called Fed engineered rally ever since two thousand and eight.

uh the behavior of the markets have altered. The other thing that's altered the behavior of the markets has been the removal of the open outcry. As we become much more electronically traded, uh things became easier in which to trade. I think these long term more uh sustainable trends have been challenged because of that. Okay. And in the current state that we're in, do you think there's enough variation amongst the types of strategies that are available to investors?

Uh I think there should be a lot more. I think that the only reason that we're seeing an increase in uh new managed futures within option strategists is because the trend traders overall haven't been able to perform as well as we would like to see them perform in prior you know, pre oh eight or two thousand and nine scenarios. And I think that uh when they're seeking

consistent returns, the option strategists have been able to perform pretty well because it's dictated on most often time decay. And while they're susceptible to different market conditions and trend traders that leave them stressed. For example, gap market movements. outlier events, um crisis like events can be more challenging in in option strategies. But uh a lot of the investors that I deal with are comfortable with that as long as they could pick a manager that has been tested.

during crisis like conditions like oh eight or during h uh where we had a flash crash condition and and then they take a look at the recovery time for that, they'll they'll uh be comforta you know, they're fine with taking risk funds to allocate to that manager. Sure. Okay.

And are CTAs confined to trading just futures and options or can they also trade, you know, other things like equities and and currencies? Uh is that a possibility? Yeah, as long as they're traded on an exchange, you know, like the Chicago Mercantile Exchange, for example, as long as they're traded.

on an exchange and they have transparency and liquidity and they're not restricted to serious capacity restraints and so forth. Absolutely. It's just they're not trading on this you know, the Chicago Board of Options Exchange contracts are not traded to actual individual stocks. Now you're dealing in a whole nother regulatory oversight. So can you just repeat that last bit? You you can't deal in individual stocks.

Correct. So the commodity trading advisors basically are trading commodities themselves. So they might trade the S P five hundred, they might trade the futures, they might trade the options on futures, but they're generally futures contracts that they're trading. They're not trading individual stocks. They can trade the index, the S P five hundred index. They could trade the dollar index. But they're not trading IBM. They're not trading Apple. And what's the reason for that?

It's a whole different regulatory oversight. So in the commodity world, we have the CFTC Commodity Futures Trading Commission and the NFA, National Futures Association, that is our oversight. And they Come in and audit, et cetera, and monitor, and then you have to be members and registered um with the CFTC and so forth. With the uh hedge fund world you're you're dealing and again, it depends on the level of your BUSINESS You might be dealing in the um

Uh you know, with the SEC and so forth in FINRA. So I guess that could be another one of the differences between a CTA and a hedge fund as a hedge fund can typically um trade individual stocks, correct? Correct. Okay. Well now let's shift this conversation to talk more specifically about starting a CTA. So I guess the first question I'd I'd ask around that is Why would someone want to become a CTA? Like what are the benefits to the trader?

Well, it's a whole different world from trading your own money, uh, versus trading outside money. So if you're a CTA, you're typically meant to manage outside funds. And through doing so, you're able to monetize the relationship of those that you have discretionary authority over. For example, we talked earlier about the fees. So if you're charging two and twenty, you can now do for yourself, you can do for others. And now you can take on a two percent management fee.

So if you have a hundred thousand dollar investment, you could charge two percent over a year's period of time. And that would be additional source of revenue for you.

And the same on the twenty percent, which is your twenty percent performance fee, but you're only gonna be charging a performance fee if you're performing and you can achieve a higher you know, higher ground every quarter so that all you're really doing is you're structuring what you do for yourself, if you are doing this for yourself, and you're leveraging that by doing so for other parties. in a discretionary aspect and also getting paid in which to do so.

And when would it make sense for a trader to consider becoming a CTA? Like at what point of their career would it be a smart move? I would say when a person has been trading their own funds for, say, three years and has what they believe to be an attractive track record to present. might be the time window in which to take a look at it to the next level. Because after three years

you would have enough history to be able to generate risk adjust returns. And while you are still categorized as an emerging manager, you've at least been tested with your own funds. And assuming you want to replicate that and duplicate what you've done for yourself, then you could take it to the next level and register as a CTA.

And in regard to the track record, would that have to be based on a certain amount of capital to be, you know, considered a respectable track record? Like if someone started with a ten thousand dollar account And they traded that over three years. Like, is that enough to be worthy of consideration? The probably not, uh because The majority of CTAs have a much higher minimum requirement. They typically have, say, a hundred thousand uh that they will

required to have under their umbrella. You there are CTAs that have lower dollar denominations. the one I could think of as fifteen thousand is the minimum, but on average they're much higher. Unless they put together some kind of a limited partnership like a fund structure. But CTAs that are accepting accounts on an individual basis so those clients can open up as a single managed account. uh versus a fund usually have a higher minimum requirement.

Yeah, no, I was more referring to the actual track record that someone puts together before they actually form a CTA themselves. So I follow you. So if you have if someone's trading their own account and they've had success in doing so with dollars as low as ten thousand. then yes, they can approach that and and utilize that same dollar amount and offer that same amount. to create a track record and put together a disclosure document and offer other investors to invest that small dollar amount.

It's just a challenging dollar amount is why I I say that. But if they've done well with that, by all means, they can attempt to to duplicate that for others as well. Well let's say they've grown this ten thousand dollar account to twenty thousand dollars over the space of three years. Can they then ask investors after forming a CTA for investment of, you know, a minimum hundred thousand dollars each? Is that how it works?

No, they can ask for the same amount, so or he could ask for say twenty thousand. Uh the key thing is to have the dollar amount dictated on the amount that he could manage where the risk adjuster returns is justified to the outside investor to even considering the program. So what are the first steps to starting a C T A? Like where where would you even begin?

Well, I think if they have let's take three years of data, so they're monthly statements they could forward on to us and we could put together uh the thirteen row performance capsules and pro forma that. So we get an idea of what that track record would look like. using real money that he's already established, but also taking into account what an investor should they have invested with him at the atception, what it would look like after the fees are taken out.

And then we would connect them with an attorney to put together the disclosure document or not necessarily an attorney, but like one of our our compliance personnel to help to get together uh with them after they compile the track record, they can get the disclosure document, which will then disclose to the potential investor the background of the trader and verify if they've had any

you know, any negative s scenarios, legal issues that they've had and so forth in relation to their you know, their background, things of that nature, we would then connect them with our capital sources And we would get everything lined up for the trading platform that they're comfortable to use, the clearing firm that they're comfortable to use.

Get them all the there's a whole checklist of what we have reporting requirements, back office requirements, disaster recovery procedures. Now it sounds like a nightmare, but it is a long laundry list of things that have to take place, but we would walk'em through that. of what they need so that they can do the business and start off on the right foot. And then we would work on getting them exposure.

Introducing them to other parties that that allocate assets. Right. And how long is that process? Like from the moment someone decides I want to be a CTA and let's say they come to someone like yourself or whoever that may be. How long until they're pretty much up and running and open for investment? Is that like six months or yeah, what's the time frame?

Well, much of it is dictated well, to get the disclosure document approved by the the NFA and so forth, it typically takes about sixty days. You know, and of course a lot is dependent on the trader getting back with questions that are are typically coming back and forth. So about sixty days. At that point we would get the three year track record on rating sites and verify those returns are within line of what the uh the administrator

confirmed and the auditor and tax preparer and so forth. Assets as far as allocations that could potentially go to the trader, a lot of it is going to be dependent on if they're willing to go to events such as The CTA Expo, which provides emerging managers to get exposure and meet allocators in a venue that's usually a one day event.

For example, there's one that's coming up in New York and they could attend events like this to start to to mingle. So unfortunately while he's a manager trying to manage assets. in the earlier stages of his business venture will require him or her to go out there and meet people face to face. so that they are comfortable with who this person is and who could potentially be managing those assets that they may allocate to him or her.

I actually have a a bunch of questions I want to ask you about marketing and how to actually attract investment too. So I'm definitely gonna pick up on this.

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You know, when someone becomes a CTA, so they've gone from, I guess, what could be considered as a retail trader as someone who's just at home uh trading their own capital to becoming a CTA. What infrastructure requirements are necessary? Does anything change on that front, like in regards to hardware or software, etc.?

Yeah, absolutely. Because if they're accepting multitudes of individual accounts, it be can become quite cumbersome. Some of the services that they can be responsible for or retain outside service providers to do so would be everything from trade allocations, daily account reconciliation, equity margin updating, et cetera.

What happens with the trading part of it is they're going to be given one account, a new account number. That's going to be their block account. And that block account will typically have their account number within it. in conjunction with multitudes of other accounts that they're managing. And they will usually have an allocation already set up before a trade is actually executed. So a lot of traders will trade in what's called unit sizes.

So they might have for every twenty five thousand dollar account one unit to trade of soybeans. I'm using that as a hypothetical example. And if they have a fifty grand account, that client will get two contracts. But they will have Say, for example, an Excel spreadsheet that will define how many contracts is supposed to be given to each account. All that they're concerned about is. that they know who the accounts are.

uh which we will have a spreadsheet established for them and that when they're executing, they know how what the quantity is based on the number of accounts that they're managing and what the unit size is for those individual accounts. So it does change in the sense of quantity.

And it may change based on how they actually execute,'cause they might find an easier way in which to do so with a different type type of platform than they're currently using. And we will walk them through all that as well. You know, you've been doing this a long time now. What are some of the common mistakes that you see new CTAs making when they get into this? I think that they don't plan

to allow more time than is needed for the assets to slowly come their way. I think many either A think that their track record is enough to draw assets, but it's not. I've seen traders that have a track record that let's just say isn't spectacular, but yet they generate a lot of allocations. So it's about it is about marketing as much as it is about the track record. And even though track records you know could be sexy.

We all know that the past doesn't dictate the future. So they have to make sure that the clients that they're attracting are ones that understand the risks associated with the potential to make the money as well. But most of them fail because they don't have the operational needs to sustain the longevity of the business. They don't have sometimes the proper risk Controls in place.

the redundancy in place, so something h if it's a one man show, they they don't have any backup if something happens to'em. They have to look at it as a longer term. It doesn't happen overnight. Learning how to trade didn't happen overnight. So they have to look at it the same way. It's a process. And I guess a similar question, but slightly different.

What are some of the common challenges that new CTAs often come up against? Like maybe some challenges that they might not expect, uh particularly in the early stages? I think the demands on I think they come into a thinking that it's gonna be just like they're trading their own account. They're dealing with different personalities of those that they're serving.

And they're not accustomed to they could be great traders but they're not always accustomed to dealing with the outside parties that they have to rely on to get other things done. Okay, so how much contact does a CTA typically have with their investors? I I guess it depends on how they're structured. If they're structured where they're the ones that are one on one with the investors.

The investors don't typically reach out as often when things are going good, but will reach out much more so when things are not going as well in the performance reporting and so forth. as far as the returns. And that can be a total distraction from the trader focusing on what he's supposed to be and that is

managing the risk and trading. So it's it's a tough line to draw. And that's why if they're gonna start a CTA business, they might wanna make sure that they have not just their trading plan in You know, with with it being as systematic as they possibly can, even if they're discretionary, but also where they have people that can help them to support the business and the potential of growth. So those people can be the ones that could contact the clients on a regular basis when need be.

On behalf of the trader.

In regard to challenges that a CTA might come up against, how does one need to think about or what considerations need to go into the scalability of their strategy? Like when is that something which is assessed? Usually it should be assessed from the earlier portion of uh what they're planning on doing as a CTA.

if they feel that the markets they're trading have capacity constraints of twenty million or thirty million, they need to take that into consideration'cause what if they get an allocation from an institutional investor then they have their entire business reliant on one large allocator and they're really not able to take on too many other accounts. So if that one large allocator pulls, you know, their business has been disrupted to say the least.

And how much of their strategy actually needs to be disclosed to investors? Like how transparent do they have to be around that, if at all? They have to be transparent enough to disclose the style of trading and the markets they're trading and what their They're anticipating further stops in the overall portfolio and while there's no guarantee that they'll be able to control the drawdown, they usually want to stipulate what that could be.

So, you know, they might have a shut off valve, so to speak, on what they're doing. A lot of them don't, they're not going to release the holy grail, but they're going to disclose enough so that the investor can determine if that style of trading and the stress points of that style of trading is something that they're comfortable with.

Okay. Okay. Yeah, that makes sense. They don't have to disclose, you know, the fine details of what actually causes their strategy to enter and exit markets and that sort of thing, right? Correct. Just to pick back up on regulation, um let's talk a little more about regulation because I know that is a big part of running a CTA. So

What are some of the checks which are done by the I think it's the CFTC before they give you the tick of approval? Like what regulation requirements need to be met prior to opening shop? Well the first thing they're gonna do is we're gonna get a disclosure document uh that like we mentioned earlier will be disclosing their background, we'll be disclosing their style of trading and the markets trading traded

And the minimum account required and it will also show the performance capsules and what they've done in their proprietary personal account pro forma with fees. That gets submitted to the National Futures Association. The NFA will then review that and they'll go back numerous times with our administrator in relation to what is needed. But in general, as far as just a general guide of forms and things of this nature, um

They're gonna f go through the what they call the Form 7R. This is getting a little bit more detailed. They have a Form 8R that's completed and filed. that the the principal of the firm does. They get fingerprints, yay. They then have to take what's called the series three, which is uh an exam. Uh'cause they're required to be an associated person. So these are we'll start with the basics that first have to take place, then we'll compile the past performance tables.

Which like I said, preferably we have three years. They can provide hypothetical trading, but once they do real trading, they're not allowed to continue with the hypothetical analysis if it's been beyond three months.

But uh after they've gone through the various forms, the seven hour, eight hour fingerprints, series three, then they will also have the CTA disclosure document. So this is kind of the order of which that this happens. And that disclosure document We'll also cover the risk of trading in the background information and the fee.

structures cause this new CTA may want to not not charge the two in twenty. They may decide to be more competitive and go with a one in twenty or one in fifteen or some are actually doing more zero management fees and a higher incentive fee. That's something that they have to decide on their own. And then of course we have um written procedures and policies that we w we as a firm can work with them on.

their operating procedures, their business continuity and disaster recovery plans, ethics training. I know, isn't this exciting? Privacy policy, et cetera. But it's it's pretty mechanical. Doing this is a heck of a lot easier than trying to manage assets because you really have to have uh the ability to to focus on on the markets and so forth and you know, be confident what you're doing. But This is a general guideline of what is typically uh needed for them to begin the whole CTA aspect.

And what about ongoing checks? Like what are the regulation checks that they need to comply with on an ongoing basis? Can you share a little insight to that? Well, th they're gonna have to primarily uh anti money laundering laws. There's a lot of policies and what their policies are they also have to follow suit on. So if you have a written policy that states that what your disaster recovery reflects is you're gonna put everything on the cloud and and the you know, and it's not on the cloud.

that's when you are not being compliant. Your marketing material has to be submitted typically to the regulators ahead of time. all forms of communication you want to make sure that you have a booklet to reflect that it's been reviewed and approved before s you know dispersing. But the key thing is ethics training AML pro you know, every year. Uh the policies that they put in place have to be followed.

None of which they're gonna be able to do this totally on their own. They're traders typically. That's why they reach out to our firm upon which we would usually, you know, have somebody within our compliance department help them and actually do an on site visit to help them to to make sure that they have everything that they need to run the business and the and the compliance um are all in in good gear as well.

Okay. And what about audits? Like how frequently are they done? Are they done every six months, twelve months, or are they just kind of Slightly random. The audits are typically going to take place every three years on average, and then in the beginning they're probably going to get audited earlier than that just because they're a startup CTA.

So, you know, after they've done their business, you know, they they could probably expect every three years. Now I know people that have been getting audits more back to back. Why I don't know. You know, it's just it's on average you can expect an audit every three years.

And they can also do, you know, hire a compliance person to help them do what's like a mock audit just so that they can review everything ahead of time so that when the regulators do walk in to their office, they're always proactive and they're prepared for that. So how much warning are they giving ahead of time that they might be having an audit done? Or do they just show up at your door one day?

They can show up on your door, on your doorstep, unannounced, unexpected. And other times they'll give you they'll give you notice. I know somebody who, you know, just received a uh a notice that they were gonna come and visit them and they give'em two weeks ahead of time.

But you can't, you know, you can't run your business on hoping that they will just announce themselves that they're gonna be showing up in two weeks. You start doing the business the way it should be done right from the get-go so that if you are blindsided. You're prepared for anything that could come at you, no different than trading the markets and some outlier catastrophic event take place.

That's how we look at it. And what happens in the case that the auditors find something which isn't compliant? What happens in that case? Well, they can s they'll they'll write up a a report and it will be like what they call um a review and and they'll address what they expect you to change. It depends on the severity of it. The most important thing being a CTA is to make sure that performances that you're distributing out there are that they are accurate.

No and that m marketing material is not misleading. How you retain clients is not misrepresenting yourself. that you're not doing business with non registered parties that are referring business. you know, th th these are certain things and that you're making sure, you know, AML's a big deal. You know, you're making sure that you know who the investors are and and how the uh investment dollars, you know, where they came from.

So the you know, the basically they they will communicate, but they can easily shut down a CTA's business if you're not doing business in the ethical fashion that you need to be doing business. Right, okay.

And what about the costs associated with this? Like are there major ongoing costs to, you know, just keep a CTA business in operation and and to comply with, you know, all this regulators and whatever else is involved, like how significant are the ongoing costs of just doing business and keeping the lights on?

As a CTA, you could be paying most of your costs is gonna be relating to the preparation of written procedures and policies and the initial costs relating to getting your disclosure document together. So your initial costs might be in the realms of say um maybe three thousand dollars just to get the the preparation work and the submission of the D Doc done. And then in terms of your training and your your series three and all that. So You might be talking seven thousand dollars.

overall to have that all done. Everybody is different in terms of the cost. Now we don't do this specifically in terms of the compliance aspect. We align them with those that specialize exclusively in you know, submission of D docs, uh helping them get their CTA up and running. We handle all the execution and the back end of things once they've reached all of this. cost I would say would be roughly seven grand. It might be more per year.

That cost goes down as of course you receive clients because now you have a revenue source relating to the clients that you're serving because you're getting management fees for managing those assets. That seems quite reasonable actually. I was expecting it to be much, much higher, but Well, it is higher if you establish a fund structure, if you become a commodity pool operator.

then your cost goes up because now you're typically dealing with the fund administrator who's generating your monthly statements for your clients versus the FCM who's generating those monthly statements. You're dealing with a lot more cost as a pool operator. 'Cause most pool operators are the ones that are absorbing those typical costs versus an a CTA that's just handling individual accounts.

the futures commission merchants generating a lot of that data. Right, right. Well let's go back to investors and marketing. So um of course I want to ask you a few questions around this subject. So What are the most common ways for CTAs to actually raise money from investors? Like how do they attract investment?

If it's a CTA that's looking to target just a a regular retail client that might have a minimum, say of fifty thousand dollars, then the sweet spot in which to generate that exposure would be through the entire I B network. And by I B network I mean independent brokerage firms uh such as ourselves. that are in the business to, you know, introduce assets to CTAs.

when they're a good fit and they're justified in in terms of their risk and their their strategy and so forth, that's the best way that I have seen CTAs grow their business is through the I B channels. And what about marketing? Like what regulations or what limitations does a CTA have around marketing? What can they do? What can't they do? I presume they probably can't.

you know, run Facebook ads or anything like that. Like what are some of the limitations and confinements that they have around marketing? They just have to submit whatever marketing material, PowerPoint presentations they have to submit to the NFA. Uh they turn over you know comments to them pretty fast so within a week they should be able to have that approved and it doesn't cost them anything to submit it to get the you know the approval letter on it. they can take their

uh their CTA and either attend the CTA expo so they can meet other IB network opportunities and other allocators in person. They could go to the hedge events. There's a lot of events that may cost them six hundred dollars or so to attend. But they're meeting an audience of potential allocators in one day. They can also take their returns and post them on Barclay, Autumn Gold, ISG, various rating sites. So those that are seeking allocations to CTAs can be made aware of them.

and see how they performed and they could do a peer group analysis on them through those sites as well. It takes time, it's a process, kinda no different than if you're developing a client relationship. You meet a client, it doesn't mean from the moment they meet you they're ready to uh to write a check. They have to know who you are and they have to trust you. Uh and it it takes it's a slower process in the sales model than what we've had in pre oh eight, but for good reason.

I don't think too many were immune from the catastrophe of oh eight. And while CTA world may have done well in most cases when it comes to trend traders, uh as the saying goes, you're only you know, you're only as good as your last trade. So You know, you have to build credibility and building credibility and trust takes time and effort.

Okay, but can they do more direct forms of marketing like paying for ads online, maybe buying a sponsorship on this podcast or any podcast like Can they do those forms of marketing or does it have to be more kind of what you described?

Absolutely. For example, there's a a manager that we're serving that uh was recently interviewed in a financial publication. So they can reach uh uh you know, investment news, they can reach Modern Trader, they could reach out to CTA intelligence, they could reach out to various publications and they can be interviewed in those publications about what they do and so forth. So those readerships can

consider uh reaching out to the CTA directly. They can do exactly what you're offering right now. Uh and you have a large audience and that would be huge for them. uh to be able to do a podcast with you and and have you interview them and ask a ton of questions so that potential allocators can learn more.

So there's a lot of things that are available to them that they can they can reach, but they wanna make sure that they can get every you know, all the I's dotted, T's crossed and so forth, go through all that and then they should have a whole marketing plan.

on what they want to do. And not everything will have the returns of what they want, kind of like trading. Do investors who invest in CTAs do they have to be a quote unquote accredited investor? Typically if they're in a limited partnership or a commodity pool, yes. There are a lot of CTAs where they don't have the financial criteria. that uh we're speaking about here right now as far as accreditation. If they're requiring smaller dollar denominations for their, you know, investors

Then typically they're not gonna want them to be accredited. If they want a million dollars as their minimum account, they're typically gonna want them to be accredited. But absolutely there that's why the trader has to decide. What dollars can the actual trader trade and feel he is successful and be able to replicate that or put forth effort to replicate that for outside parties as well? Right.

And from your experience, what are some of the things which investors are looking for most? Like what sort of leads their ultimate decision on which CTA to go with because you know you said earlier that those with the best performing track record don't always get the investment that they they think they're going to. So what's ultimately The leading drive to what causes people to invest? Exactly. Like what are the things which investors are really looking for?

Well, I think it depends on who the who the client is and the audience and the distribution channels. So for example, if I were going to an advisor, an investment advisor, uh they're not gonna be targeting

A CTA that might have an eighteen percent return where he's had a fifteen percent drawdown, they're gonna be more focused on retention of assets and preservation of growth than any other formality. A retail client typically would be willing to take a higher degree of risk um to achieve a higher return than an advisor would.

I'm speaking in general terms of course. Uh but it's it's interesting because we do have investors whose focus is more on on the sector aspect. Like they want to find a trader that only trades the metals or only trades the commodities. So it's pretty wide based.

When I was talking earlier about a process of of sales or process of relationships, that's really what it's about. In the earlier stages of a s of the three year track record, if they go to events and expect to take a lot of time out of their their office to mingle and meet.

I think the trade off would be that they're gonna get uh a a higher ranking uh for people to consider them to invest with if if after one year where they've met, uh they've seen them continue to manage risk in in the fashion that they're comfortable with. And I should probably ask you a question around investors withdrawing funds. Like how easily can investors withdraw funds? Is there a certain lock-up period? And just to take that one step further, so I guess two parts to this question.

What are the consequences for a trader if they lose money? Well, if the trader loses money for the cli if the client needs funds, the first question is the if it's an individual account. The trader will typically want twenty four hours to unwind the positions in a methodical fashion.

Okay. So some of the traders in their d in their disclosure documents will stipulate that they want at least five days, just because they want the slow and methodical way to unwind positions without this rapid market order on all positions. But The fact is, most of them will be able to unwind the positions on day one and day two wire funds.

And they will wire the funds out, excluding if there's any money that's owed to the trader in relation to management fees and or incentive fees. But they can usually get the money right away. That's why when oh eight took place And if an investor was making money with the CTA but losing in many other asset classes, they still may want to withdraw funds from the CTA simply because it's a liquid asset class.

unlike many other investments that are not. And what happens if the trader loses money for the investor? Like how does that is there are there any qu consequences to the trader? Well, absolutely, because if you invest with the trader and you've lost money, you can expect that you're not gonna be right all the time. You can expect that not every month will be profitable. We realize that to achieve success there's gonna be risks taken in which to do so. It's a matter of

Are the are the losses understood? Is there reasonings behind them? Did something change in the systematic manner in which he's trading? Did anything you know, what was the rationale behind it or was it just normal? conditions and is it a dollar amount that he r that he can recover from? Typically investors if they're sold the right way, they're sold in such a way that they understand losses can and will happen.

It's about are they losses that can be recoverable? In other words, if I take a fifteen percent loss in a market that hasn't moved very much or th you know, uh with what the style of trading is Um, I would really dig into why what happened and

is it gonna take me five years to recover from those losses? You know, you wanna know the road to recovery and things like that. It's not devastating unless of course You have a a a trader that's done well for five years and all of a sudden his worst drawdown uh has been double what it's been in the past. Yeah, I think that's a really good answer.

And one question I meant to ask you earlier actually, you know, a lot of people listening to this all around the globe, I think about fifty five percent, maybe sixty percent, something around that of my listeners are in the US. But for those outside of the US Is it compulsory that you need to live within the US to run a CTA? No, there's th there are different again, we're going into the regulatory stuff. If you're in Canada, uh there's there's

additional layers of responsibility in the regulatory environment. If you are living outside and you're not a US citizen and you're managing assets, you can do so where the big variances exist has to do with the investors. Or the in you know, and and and how the solicitation is taking place. Okay. All right, Nell. Well let's leave it at that for now. Um let me ask you, where can listeners go to find out more about you if they wish to?

They can reach out to me either via email or toll free. I'll give you both if that would be okay. Yeah, go for it. The toll free number is eight hundred two three eight two six one oh. Again it's eight hundred two three eight two six one oh and or they can email me directly at N Sloan S L O A N E at C T G Trading dot com. Okay. So that's your website also, ctgtrading.com?

Correct. And if they go to the managed futures sector on the website, we do have some brochures on there, such as a guide to starting your CTA program. uh customized solutions and things of that nature. We don't have as much on there as it pertains to the regulatory stuff and we would welcome the opportunity to have the potential CTA. speak to our compliance department to go into greater detail on the checks and balances that you know they can expect.

Sure. Okay. Well, yeah, I mean if if anyone wants more info, they can certainly uh they certainly know where to find you at. So Neil, thank you very much for coming on the podcast. This has been hugely interesting. I appreciate it. Sure. Thank you for the invite. But rest assured there are more episodes loaded with soon. Stay updated with the if you leave a rating. with traders.