Jun 28, 2021 By: Greg Baracy It’s finally happened! That moment every emerging asset manager hopes for…. meeting an asset allocator. Congratulations, most people who start a Commodity Trading Advisor (“CTA”) or Commodity Pool Operator (“CPO”) never get this chance. If you’re lucky enough to get five minutes of their time, then next question is…. are you prepared? Like the old saying goes, you only have once chance to make a first impression. This is even more critical when you’re an emerging manager trying to raise assets to keep the lights on and eventually building a viable business venture. Most people who start a CTA or CPO often try to walk before they crawl. By this I mean they believe they can begin raising assets before the foundation of their business has been properly structured and are in position to speak with asset allocators. Below are scenarios of two new CTAs, both newly formed entities and registered with the CFTC/NFA. After laying out each example, we’ll discuss afterwards who is in a position to raise assets and who is not: Example A: A CTA has a futures strategy of about 18 months with friends and family money and has had a successful track record. Nothing earth-shattering, but is consistently profitable month after month. Their strategy is nothing fancy or exotic, it just works. They have a Disclosure Document (“DDOC”), Policies and Procedures Operations Manual, Customer Forms and have complied their track record. Example B: A CTA has a forex strategy and only has simulated trading with no actual funds. The results have been mixed; some months have been great but they’ve also had months with significant draw downs. They like to think of themselves as “Home Run Hitters”. They have a Disclosure Document (“DDOC”), Policies and Procedures Operations Manual, Customer Forms and have complied their track record. Both sound like they’re in a position to present their strategy to an asset allocator, right? Wrong. Appearances can be deceiving and once you begin to peel back the layers, which any wise allocator would do. Provided below is the context to each scenario to illustrate how and why one CTA is in a position to present to an asset allocator and one is not. Context – Example A: The CTA has retained a professional consulting firm who specialize in CFTC/NFA regulatory matters, because they understand that “they know what they don’t know”. Their DDOC is crafted to tell their story in a way that will set them apart and highlight the key points that allocators look for. Their Policies and Procedures Operations Manual is tailored exactly to match how their business operates on a day-to-day basis. Their Customer Forms are applicable to the business which they intend to conduct and their track record is compiled according to CFTC reporting guidelines. Context – Example B: The CTA preferred a “do it yourself” approach, after all they’re a smart person. They craft a DDOC that only contains a strategy description and their trading results. However, they do offer on the cover a very unique fee structure, hoping to attract investors with very low minimum investments in the hopes of quickly raising their AUM. They have a Policy Manual in “name only”, missing many of the key components to be compliant with NFA guidelines and expectations. They downloaded their Customer Forms from a legal website that are generic and they use their performance statements provided by the FCM who houses their trading account. Now that the context has been provided, it becomes clear that the CTA in Example A is in a much better position to speak with an asset allocator. Here is why: Example A: The CTA attends a networking event and is lucky enough to strike up a conversation with an asset allocator. After taking a look at your tear sheet, the allocator says “Everyone I’ve met here has impressive trading results, but none are ready for an allocation. They have no DDOC for us to review so we can decide if we want to conduct further due diligence. Please tell me you’re different.” Because the individual has properly structured their CTA, they confidently say “Well, if you’re interested in continuing the conversation, I can send you a copy of my DDOC and we can schedule a meeting for a full presentation shortly thereafter if you’re still interested.” About the Author Greg Baracy has over 15 years of experience in the financial services industry. His expertise spans across many verticals such as investment banking, financial advisory, quantitative and qualitative analysis. His area of focus at Turnkey is in new business origination, customer on-boarding and relationship management. Greg also regularly conducts reviews of customer outside office locations for Turnkey clients. Before joining Turnkey, he managed the Mid-Atlantic, Midwest and Northeast portfolio of municipal issuers for one of the big three Wall Street Bond Rating Agencies. During his tenure, he grew the agencies portfolio to its largest size since its inception. He holds a degree in Economics and Applied Policies from Michigan State University.