Jan 31, 2023 By: Turnkey Trading Partners Turnkey Trading Partners has been setting up CTA’s for over 15 years. It’s likely as a firm Turnkey has launched more advisors than anyone in the space. Anyone looking to start a CTA knows there are several guides available on the NFA website about the sector. Information is also available through various compliance consultants and brokers. This guide is different. Within this article Turnkey has focused on 8 things money managers do not usually consider when they plan to raise capital or when they start a professional advisory business. Turnkey would contend this list and how each point is handled can be a make-or-break foundational decision. In theory, these points could apply to any asset class or scenario where an individual trader wants to use his own track record to raise capital or charge advisory fees. We however have focused solely on advisors wanting to offer their services managing commodity options and futures, forex, crypto currency, and swaps – all CFTC regulated products. Eight Secrets No One Shares with A New CTA Many traders are not aware of the psychological effects of managing other people’s money. Turnkey has watched even the most seasoned professionals make poor trading decisions shortly after accepting their first clients. For many, the psychology of experiencing a gain or loss for their own account is not the same as it may be for customers. With startling frequency, Turnkey has observed traders succumb to their emotions in this regard. Once doubt and fear take over trading can become a debilitating chore. This distorts market views, methods, and overall risk management. Eventually it will ruin even the most capable traders. It is not uncommon to see a new CTA launch and immediately go into a drawdown. Many traders are self-sufficient by nature. When they trade their own capital, their only communication is with themselves on a day in and day out basis. A professional CTA however must also manage a business. To be successful money managers must engage with brokers, back office staff, compliance obligations, accounting and reporting, marketing, regulatory audits and inquiries, and their investors all while successfully trading every day! Bias aside Turnkey offers one of the most competitively priced and comprehensive start up packages to launch a CTA in the United States. Start-up CTAs need to outsource! It has been our observation that if the start-up fees and process are too much to handle – so too is the idea of running a CTA day in and day out. A proper budget and expectations must be established. For most, outsourcing as much as possible so that trading can be the primary focus is critical to long term success. Many new CTAs believe that assets under management increase solely due to high overall returns. This simply is not true. CTA’s need to target risk adjusted returns. There are many factors that come into play when a CTA is trying to raise money. Returns are certainly one of these factors but so too are overall return volatility, margin to equity utilization, strategy type, trading and risk management approach, business and regulatory infrastructure, as well as trading and company pedigree to name a few. New CTAs certainly need strong returns but many overlook the other factors that are important to investors when trying to raise capital. Sometimes it is easier to check investor boxes through non-return-based metrics, than it is to outperform your peers. Most traders do not know understand how to scale positions. New CTAs often begin trading friends and family money. Each execution is for only a few contracts. As CTA’s grow overtime, they are responsible for managing much more trading volume. The difference between trading one contract and a thousand can be significant. Large trades may result in only partial fills or partial executions. Although a blocked or bunched order can be used, practically speaking, at some point trades have to be “worked” to get competitive pricing and to fill the entire order for your book of business. This change in trading style can be very difficult to adapt for certain strategy types and markets. Professional derivatives traders must understand the nuances of notional funding. Many investors will attempt to take advantage of notional funding when opening an account with a CTA. CTA’s that have only managed personal funds on a cash basis have a difficult time adapting to this concept. When choosing a minimum account size for a strategy both cash and nominal trade levels must be considered. For those unfamiliar with this concept, working with a broker or consulting firm that can help you will be critical. A good broker can make or break a CTA. Most CTAs start after successfully managing friends and family money. It is natural they are concerned about commission rates for themselves and their closest relationships. Once they are registered this thought process is generally incorrect. In Turnkey’s opinion CTA’s need to find an Introducing Broker (“IB”) or Futures Commission Merchant (“FCM”) they trust. A good broker will help CTAs to open customer accounts, manage allocations, and deal with many back-office functions. The right brokers who are aligned with CTA strategies can also help to introduce assets and assist with capital raising. Many CTAs are reluctant to work with brokers due to higher commission rates. Unless commission costs will be highly detrimental to the overall strategy this is not a rational fear or objection to working with a broker. When starting a CTA, you should not expect other people to raise money for the strategy. Turnkey has launched three to five CTA’s a month for the better part of fifteen years. Every new CTA launch believes they have the best trading strategy for the market. While that may or may not be true, CTAs that believe gaining access to a network of brokerage firms will lead to a flood of clients are mistaken. While capital allocators can be useful, each of them has access to only a relatively small pool of investors. Within this pool of investors there may only be a handful who might be interested in a new strategy at the time of a CTA launch. Investors can be very selective about which CTAs they want to work with and when. Simply registering and starting a CTA in and of itself isn’t enough to raise assets. Plan to source your first investors yourself and for others to become interested over time. As CTAs grow assets returns typically decrease. There are many reasons for this— some of the most common have been noted on this list above. As AUM increases trades become more crowded. Similarly, the number of institutional investors working with the CTA will increase. These investors demand strong risk adjusted returns with relatively low volatility. When projecting your pathway forward as a CTA you should consider this in your modeling. Seek Help and Guidance As noted above, outsourcing as much as possible to an external partner as a new CTA can make or break the business. This can free up resources that can then be used to focus on trading and other core business activities. Only then will a new CTA be capable of driving growth through trading while providing higher levels of customer service. An experienced outsourcing provider will have a wealth of knowledge about the most current industry standards, up-to-date compliance requirements, various security protocols, and help to ensure your organization is following best practices. By leveraging this expertise, organizations can reduce costs associated with compliance while still meeting or exceeding all relevant standards. To learn more about Turnkey’s outsourcing options please contact Turnkey Trading Partners for assistance and to speak with someone today.