How to Evaluate Commodity Trading Advisors
To often when one looks to invest with Commodity trading advisors they focus only on the recent ( 2-3 year) returns. This can be a mistake. One who looks to invest in commodity trading advisors need to understand not just the returns and track record but rather how much risk was taken on in order to generate those returns. To often I have seen investors of commodity futures trading run to the results of one of the years hot commodity trading advisors. To chase results without fully understanding the methodology and more so the risk is a recipe for disaster once the first draw down occurs. When I look to invest with a commodity trading advisor I want to fully understand what gets them in a trade…what gets them out of a trade with a loss as well as a profit. There are times that the commodity trading advisor does not want to disclose their methodology. That is their right…but how would you feel when you do not understand how they trade and you encounter a hefty draw down. You would probably start second guessing and in many cases that I have seen, leave the commodity trading advisor. In my personal case there are cases since I am a commodity trading advisor myself that another potential commodity trading advisor that I would look to invest with does not want to discuss the above mentioned issues. In all reality this is foolish as I allocate 2-3% of my net worth to any idea..( even my own trading programs). I am constantly seeking new and passionate commodity trading advisors. Truthfully no one has the secret. No one knows more than the other. The key to long term success in commodity futures trading is spreading out your risks as in commodity futures trading anything can happen. The only holy grail in commodity futures trading is patience, discipline and maintaining a strong risk profile.
Some quick and short questions to ask your potential commodity trading advisor are as follows. ( They can give you a quick litmus test of how the commodity trading advisor sees risk)
1. Risk per trade
2 Risk per sector
3 Open max open trade equity
4 Margin to Equity
The above mentioned the quantitative methods to start to investigate a commodity trading advisor. There is the whole issue of qualitative. Wouldn’t you like to know if the commodity trading advisor had a drunk driving arrest or did not pay his real estate taxes on his house. You might laugh, but integrity is one of the major components of a commodity trading advisors success. You want to deal with someone honest. There are online services in which you do background checks on commodity trading advisors as well as the NFA which is the regulatory agency for commodity futures trading.
Bottom line don’t chase numbers, chase a concept that is logical, simple and with a strong level of money management & risk management. Even with that said there are no guarantees…and I will promise you, some where down the road your biggest draw down will occur. If you understand the methodology, understand the risk parameters you should be able to weather the draw down.