The Managed Futures Small Account Conundrum

Article Written By: cheapmes@gmail.com

Small managed futures accounts (less than $250,000) face considerable challenges not experienced by large managed futures accounts. Considering that most commodity futures contracts have face values in the tens or hundreds of thousands of dollars, it is easy to surmise that these contracts are for large accounts. But, low-margin requirements have long attracted smaller speculators and are the proverbial rope to hang oneself with”.

Let s analyze why large managed futures accounts may have it easier than small managed futures accounts. First, large managed futurers accounts can afford to trade almost any opportunity at any time. There are over 100 tradable commodity markets worldwide, and should buy or sell opportunities simultaneously exist in any or all of them, a large managed futures account can easily afford the margin and exposure. It is said that when it comes to investing that diversification is the only free lunch” and large managed futures accounts can afford to diversify with impunity. This is in stark contrast to the small managed futures account where prudence dictates only having risk and exposure in a few markets simultaneously.

A large managed futures account is not restricted from trading contracts whose volatility is fairly high. For example, a London copper trade with a stop loss $14,000 away represents a risk of 1.4% in a million dollar managed futures account, but in a $100,000 managed fuitures account, this same trade would represent a risk of a whopping 14%! Any sensible Commodity Trading Advisor would avoid that trade in such a small account; however, having to skip these opportunities is yet another penalty paid by the small managed futures account.

What s more, the large managed futures account can use one of the easiest forms of risk control available, contract scaling. For example, let s assume a large account is long 50 gold contracts during a large bull market run and wishes to cut his open trade profit exposure. He can simply scale off as many contracts as he needs to lock in profit, while maintaining his profitable position, but what can the small managed futures account do for scaling out if he only has on one contract in the first place!? Once again, the small managed futures account does not enjoy the flexibility to control risk in the same fashion as the large managed futures account.

Now, for all the negativity I ve just outlined above I believe the smaller account has advantages over large ones. Small accounts are able to trade markets that would be far too illiquid for large accounts. Most institutional size funds are nearly confined to the trading of financial and energy instruments. They end up missing out on trading opportunities in the traditional physical commodity markets.

Specifically commodities like Grains, Foods, and Fibers and the like. This creates a lack of diversification and an over reliance on those few sectors. The ironic thing is that many small accounts end up with the same problem because they have chosen to deal with their small account problem by only trading a few (or one) market! They end up missing out on the sharpest edge they have on the big boys”.

Monitoring a large portfolio is crucial because if traders limit themselves to a predetermined small portfolio, how do they know that those markets will be the best markets? (Hindsight bias portfolio selection is a form of curve fitting and is a leading downfall of many traders). If an exceptional opportunity develops in a market outside a predetermined portfolio, a trader should want to take advantage of it.

About the Author

Managed futures by commodity trading advisor expert Dean Hoffman of DH Trading Systems.

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