SELECTING A CTA
There are probably as many factors that go into selecting a trader as there are actual traders. Below is a list of some of the key factors Mt. Kemble considers with their clients, when searching for an appropriate investment. The list is not intended to be exhaustive nor listed in order of importance:
Minimum Investment- clearly the minimum investment required or suggested by the CTA will have an impact on the likelihood of investment.
Assets Under Management (AUM)- All else being equal, a CTA with greater AUM will probably be a more substantial entity- larger staff etc.
Sharpe Ratio- The sharpe ratio of a program is a commonly used indicator describing returns in excess of the risk free rate of return, adjusted for volatility. More simply, it is a good basis for comparison of the ‘smoothness’ of returns among different programs.
Timing- “OK, we have selected a manager to invest with. Do we start now?”
Returns- While past performance is not indicative of future results, past performance almost invariably influences an investor’s perception of an investment program.
Trading Style- “What does this manager do, and how will it compliment my portfolio?”
Markets Traded- Is the program diversified across many sectors, concentrated in a few related markets or focused upon a single contract.
Margin to Equity Ratio- The M/E Ratio will describe the percentage of trading level committed to margin. For example, a CTA citing a 25% M/E will commit roughly $12,500 to margin, when trading a $50,000 account.
Duration of Trades/Exposure- The amount of time a CTA holds positions is important in that it offers some idea as to how long an investor is exposed to the market.