Choosing a Commodity Trading Advisor (CTA)

In our opinion the most important factor in selecting a CTA should not be what you or a friend feels about a CTA, but rather the CTA's actual track record. Selecting a CTA can be compared to choosing an employee. You probably wouldn't rely so much on what the prospective employee tells you but what his resume or track record documents.

When scrutinizing a CTA's performance record, we suggest at a minimum the following four key ingredients, though a particular CTA may not have a performance record that includes all items:

• A minimum of a two to three-year performance record.
• At least one million dollars under management
• Based on combining all the years, an average return of at least 20% per year, net of commissions.
• CTA who will negotiate or waive management fees for clients

Wouldn't you feel a lot more comfortable during a losing period if you knew that over any 3 years a CTA never suffered losses so large that he or she didn't subsequently recover and make new highs in equity, while averaging a return of at least 20% per year for the three year period? Wouldn't you feel even more comfortable if you knew the drawdowns were in line with the historical drawdowns in the performance record.

While not a guarantee of future performance, if the previously mentioned four criteria are satisfactorily met, we believe you should now have the basis for what we like to call "justifiable confidence", which is simply a reason for believing in a CTA. Believing and having confidence in whatever you are doing is an important condition of success in any endeavor because it can provide the emotional fortitude to persevere and over-come setbacks or disappointments.

Next: The Investment Game Plan