That’s a tricky one. Do you mean: Best last year? Best for all time? Best risk-adjusted return? Best in terms of lowest drawdowns?

We’ve dedicated extensive resources over the years to analyzing and testing a rankings system that would best reflect what we believe to be the important metrics for measuring skill in this investment space.

This is trickier than it looks. Put too much emphasis on returns, and you penalize those who control risk. Too much emphasis on experience, and you penalize a potential new star. Too much reliance on the present, and you discount the past, too much on the past and you discount the present, and so on.

We answer the question via proprietary rankings which measure thousands of alternative investment programs across different metrics related to return, risk, correlation levels, minimum investment, and length of track record.

See our top rated programs here: Managed Futures Rankings

Managed futures investments are not right for everybody due to the substantial risk involved. They may be appropriate for investors seeking the addition of greater diversification to their traditional portfolios with a long-term investment horizon. Managed futures allow investors the potential to gain exposure to markets and strategies uncorrelated with traditional asset classes. In addition, institutional investors are increasingly allocating capital to managed futures. These investors may include pension funds, endowments, and family offices. However, managed futures may not be right for everyone, and it is important for an investor to understand all the risks involved before investing in managed futures.

Managed futures are not a short-term investment. It is important to note that managed futures should be considered a long-term investment and one that should be added to a traditional portfolio for greater diversification. This is primarily due to the cyclical nature of markets, which affects all investments. Even managed futures programs that are very successful have periods of significant losses, or drawdowns. Managed futures should not be viewed as a short-term investment or something that should be traded in and out of quickly.

CTAs & CPOs are regulated by both the federal Commodity Futures Trading Commission (CFTC) and the National Futures Association (NFA), the latter being a congressionally authorized, self-regulatory organization within the futures industry. In order to trade customer accounts, all CTAs must be registered with the CFTC and be members of the NFA or enjoy an exemption.

Commodity Futures Trading Commission (CFTC) rules require delivery of a disclosure document at or prior to the time an advisory or subscription agreement is delivered. The disclosure document includes the principal risk factors and costs of participating in a particular CTA or CPO program including the potential impact of fees and expenses, the “break-even point” expressed both as a dollar amount and as a percentage return necessary to recover one’s initial investment, if applicable. The CFTC has not passed upon the merits of participating in any one particular investment or on the adequacy or accuracy of any one disclosure document.

A commodity trading advisor must provide a prospective client with the CFTC-required disclosure document at or before the time a trading agreement to direct a client’s account is solicited or entered into, whichever is earlier, and must obtain a signed and dated acknowledgment from the prospective client noting that the client has received the disclosure document. Disclosure documents must follow a CFTC/NFA-specified format, covering – among other topics – the identity of principals, principal risk factors, a description of the trading program, a complete description of each fee charged by the commodity trading advisor and a disclosure of material litigation.

Commodity trading advisors cannot accept funds from prospective client’s in the commodity trading advisor’s name. Instead, customer funds are held in a segregated account at a Futures Commission Merchant (FCM).

Generally speaking, most CTAs charge a 2% annual management fee and a 20% annual, performance-based incentive fee. These fees can, however, vary among managers. For example, some CTAs may not charge a management fee at all but will increase their incentive fee to gain greater participation in upside performance. Depending on the investment size, fees may also be negotiable. CTAs may also charge an accounting fee in addition to the management and incentive fees. All fees charged by a CTA are described in the CTA’s Disclosure Document and should be scrutinized carefully before opening an account.

Management and incentive fees are typically deducted on a monthly basis from the client’s account based on the CTA’s gross performance. However, time windows may vary, and some CTAs charge clients quarterly. The incentive fee is applied to the month-over-month-end profits that are in excess of the previous “high-water mark.” The incentive fee is calculated net of all fees and commissions. Realized and unrealized (open equity) profits and losses are normally included in this calculation.

A high-water mark is the performance level that the CTA must exceed in order to charge incentive fees and typically is calculated net of brokerage commissions, exchange fees, and the CTA’s management fee and incentive fee payments.

For example, an account with a beginning value of $1,000 earns trading profits of $100 and pays a 20% incentive fee during the first billing cycle. The actual ending account value for that billing period is $1,080 ($1,000 + $100 – $20) and the CTA would report these gains as +8% (80/1,000). Then, $1,080 would be used as the high-water mark for the following billing period.

If the CTA made another $100 during the second billing period, the fees would again be $20 ($100 x 20%), leaving an account value of $1,160 ($1,080 + $100 – $20); $1,160 is now the new high-water mark. The performance would be reported as +7.4% ($80/$1080.)

Suppose that the CTA lost money during the third billing period. The high-water mark remains $1,160 and an incentive fee would not be charged again until the account value exceeded that amount.

Management fees are charged regardless of performance or high-water mark, and are based on account value. It is essential that an investor understands the fees inherent in managed accounts and the methodology used for their calculation. Fees are addressed in the CTA’s Disclosure Document and advisory agreements also.

Minimum investments via managed accounts can range from $10,000 to $50 million depending on the program. In most cases, the longer and more successful a CTA’s track record, the more likely it is that he or she will require a higher account minimum. The CTA’s target investment audience also influences required minimums. CTAs who predominantly work with high net worth individuals and institutional investors are likely to require higher account minimums. In general, managed futures investments are not suitable for everybody as they carry substantial risk of loss.

Notional funding enables qualified investors to invest in a CTA program at a lower minimum by using increased leverage. Keep in mind, that increasing leverage also increases risk. For example, for an account with a minimum of $100,000, an investor may want to fund the account with $50,000 of actual funds and $50,000 of notional funds. In that instance, the notional value of the account is $50,000 and the nominal value is $100,000 (nominal – notional = actual). This means that the account has $50,000 of actual client assets but will be leveraged to trade like a fully funded $100,000 account. The same volume and number of trades placed in a fully funded account ($100,000) will be employed in the notionally funded account ($50,000), thus increasing the margin/equity ratio.

It is important to note that the degree of risk increases as leverage increases. In the case above, the profits and losses of the notionally funded investor would be magnified by two. If an account fully funded at $100,000 experienced a 2% profit or loss, then an account notionally funded at $50,000 would experience a 4% profit or loss. Notional accounts are normally reserved for those clients who qualify and meet certain net worth requirements. The Notional Account Agreement can usually be found in the Disclosure Document or will be provided upon request. Keep in mind also that with notionally funded accounts, the advisor earns fees off of the nominal amount (nominal = actual + notional; in this case, $100,000).

CTAs report performance net of all commissions and fees. Performance figures are commonly found in the CTA’s Disclosure Document and marketing materials. Customers will also receive statements from their FCM showing all activity in their account.

Managed accounts normally do not entail lock-ups. Lock-ups are more likely to be found in fund products. If there is a lock-up, it will be referenced in the Disclosure Document.

Investors have access to a number of statements, including day-end and month-end statements showing all trade activity that took place in their account.

Yes, but they must be invested through a “self-directed” IRA. You must first open a self-directed IRA that accepts futures accounts through a third-party trust custodian and then open a futures account under the custodian’s name. IRA funds that are placed directly into a futures, options, or foreign exchange account could cause unintended tax consequences for investors. A self-directed IRA allows the investor to roll his or her assets forward and continue to let them grow, tax-deferred.

All gains earned from managed futures accounts are taxed as if they were made up of 60% long-term capital gains and 40% short-term capital gains. Therefore, 60% of the gains are considered long-term capital gains are subject to a maximum federal income tax of only 15%, compared to the short-term capital gains that are subject to a top tax rate of 35%. Unlike many other investments, such as stocks, which need to be held for at least 12 months before they gain the coveted long-term capital gain rights, managed futures investments do not have to be held for a specified period of time in order for the 60/40 rule to apply.

Our eyes used to gloss over too when reading about deciles and such, but it’s just dividing a bunch of values into subsets. Divide into 10 segments and you have deciles, 5 segments and you have quintiles, and so on. When we rank programs by different quintiles and show their ranking, such as “assets under mgmt., 1st quintile”, that means that program is in the top 20% of programs in terms of their assets under management, or said another way- has more assets under management than 80% of the programs out there. A program in the 5th quintile, would be in the bottom 20%, with 80% of programs having more assets under management.