Managed futures isn’t for everyone, but how do you know if it’s for you? When someone calls us asking about managed futures, we often ask a series of questions to determine whether they’re well-suited for an investment in the asset class, and what type of investment in the asset class should be made. Trying to figure out if it’s a good fit for you? Ask yourself:

1. How much risk capital do I have available to invest? If you’re looking through our database of managed futures programs, you might be cringing a little bit at the price tag of investing in the asset class. $5 million and $10 million minimum investment levels have been enough to turn many an investor off to the idea of allocating with a CTA. Now, you don’t necessarily have to put up the full amount due to the use of  notional funding (see here for a full explanation), but if you’re looking to do managed accounts, you should probably have a minimum of $250,000 available to invest.
2. How strong is my stomach? If we’ve said it once, we’ve said it a million times – drawdowns can and do happen. How much of a loss could you take in your account before you started losing sleep? If your answer is around 5%, then managed futures may not be a good fit. In the long-term, if you’re using the managed futures indices as an imperfect proxy for the asset class’ performance, a 5% loss ten years ago would have been made up for several times over, but if the very idea of a sharp loss makes you queasy, then you probably don’t have the requisite risk tolerance to successfully invest in managed futures. On the other hand, if you can weather through a 5%, 10% or larger drawdown, your tolerance may make you a good investment candidate, and there are a variety of CTAs that may fall within your comfort level.
3. How old are you? This may seem largely irrelevant, but if you’re 85 years old, betting your nest egg on an investment, and it suffers a 20% drawdown, it doesn’t matter where you invested – you’re in trouble. Appropriate risk management according to your age and goals is critical in the managed futures space.
4. How would you describe your investing style? If the immediate answer here sounds like “buy-and-hold” or “passive”, managed futures is not for you. Successfully investing in managed futures requires perpetual risk management. While working with the right broker can take care of the laborious parts of that, you’ll still need to have open and honest communications with the broker to ensure that the portfolio you build is appropriate for you, where you’re at in life, and what you’re trying to accomplish.

Of course, if you’re trying to invest in a program reserved for QEPs or Accredited Investors, there are a slew of additional questions you’ll need to answer. It surprises people to hear that, based on answers to questions like these, we’re typically more likely to turn a potential investor away than advise them to allocate. While some might think that’s crazy, we think that’s us doing our job. What would we tell you? Your answers to these questions are a good starting point.