There is a strong contingent of CTAs who offer diversification without sticker shock. Many of these managers offer diversification at investment levels that are not too small or too large, they are just right.

Peter Hanson, principal of Astor Capital Management, points out that many experts say that 10% to 20% of your money should be in alternatives based on modern portfolio theory.

“The research says that 20% of your money should be in alternative assets. Of the 20% maybe we should be 50% , or 10% in total,” says Hanson , who operates a short-term currency based CTA with a $50,000 minimum investment level. “We get to the $50,000 number by saying 10% of $500,000 is $50,000. So we figure somebody with a half million dollars of liquid net worth is probably someone who is relatively smart and understands the idea of being diversified.”  

The Barclay Hedge CTA database lists 335 programs with track records of at least one year with minimum investment levels of $100,000 or less; 175 with minimums of $50,000 or less. But a large number of those are commodity pools; the number of CTAs offering managed accounts at those levels are less and tend to be niche programs that trade one particular market or market sector. 

It is hard for the typical long-term diversified trend follower to offer smaller minimums because the programs have to allocate margin capital to each market they are in for each investor. If you are in 25 or more markets , that adds up, especially if you are on the safe side and do not want to dedicate more than 20% (which would be considered the high side of normal) of equity to margin.

There are quite a few forex specific managers who offer lower minimums. This is due to some of the advantages of forex. A CTA trading futures will have to allocate at least one ($100,000) contract to each account, whereas a CTA trading in the spot forex market can trade a specific dollar amount representing all of their customer orders and split it pro rata among its customers. While this can be done by operating a commodity pool, the CTA using spot forex can offer the benefits of managed accounts with the ease of a fund.

“We have a lot of accounts with amounts that are to the right of t he decimal point. We trade $10 million and divide pro rata per everyone’s account,” Hanson says. “When I did futures it was a pain cutting it up and dealing with split fills.”

Hanson points out that $ 3.2 trillion per day is traded in the spot forex market, which is an advantage for currency traders over other sector specific programs. “Everybody plays in it; central banks, commercial banks , investment banks speculators, hedgers, everyone is in the market so nobody can manipulate it or corner it,” Hanson says. Some guys are fundamental, some guys are technical , there are algorithmic guys; everyone is doing different things , it is one big trading place.”

Short-term stock index programs also tend to offer lower minimums . The success of the mini stock indexes, 1/5 the size of the big contracts, traded electronically has also been a boon to managers offering lower minimums. This has helped in two ways: obviously the smaller contract size allows more maneuverability plus the electronic executions makes it easier to trade short-term and intra-day programs. A day trader taking smaller chunks out of the market does not need as much capital as someone holding positions from several months.

“We have the option to trade one big one or five little ones,” says Todd Fulton, consultant for CTA MSLO Asset Management. “The precisions available [in the minis] and electronic contracts have been wonderful for the CTA world for the same reason, not necessarily because of the small size but because of the precision available.”  

Many option writers offer their programs at lower minimums as well.

EMERGING MANAGERS  

Of course the biggest group of CTAs offering lower minimums are emerging CTAs who can’t justify a $1 million minimum with only a few hundred thousand under management. These managers, if they are not trading a specific market sector , will typically increase their minimum level as they grow.  

“Generally it is the emerging CTA that offer this size because they need to grow assets which is sort of a catch 22 because the smaller CTAs offer the smaller accounts,” says Holliston Hurd of CTA Futures Truth. “Then you run the risk with a less experienced CTA that may not take into account all of the things that can affect [a program].”  

Hurd works along with her father John Hill, who has been managing short-term future s program for many years. She says they are debating whether to continue to offer the lower minimum program. Their Sam 101 program ($50,000 minimum) only trades four of the 14 markets their higher minimum program trades and is more volatile. “Obviously a s a CTA we would prefer to have all $200,000 accounts but we feel there is a huge market for the $50,000 account provided the client s understand it is much more volatile. If they are comfortable with that and understand the risk, we fee l this is a good product,” Hurd says. She adds that it is an underserved group.

A high net worth client who is looking to diversify among CTAs might have a $250,000 portfolio , says Hurd. “Our feeling is that you should only be putting between 10% and 25% in managed futures, the other 75% should be made of stock, bonds and cash.” That doesn’t leave enough to invest $200,000 or more in managed futures. “If your 25% is $ 200 ,000 to $500,000 we further recommend that you diversify among CTAs ,” Hurd says. “You don’t put all of that with one CTA. Hence if you have 200K and you find four good CTAs, you put $50,000 with each one.”  

Hanson also is targeting this underserved group of investors. “These are people the guys in the wealth management world call mass affluent. They are part of the masses but they are on the affluent side. If you have a half million dollars of cash in the bank you are [wealthier] than the average bear,” says Han son , who estimates that a little more than half of his investors qualify as accredited investors (annual income of $200,000 or more with a $1 million or greater net worth). “We really wanted to build a program that would allow the smart investor without a lot of cash to get involved in smart diversification. A bunch of our guys are not accredited investors.”

Offering lower minimums requires more accounting firepower and usually also involves more client handholding, says Hurd. “It is a lot more hands on. It is much more customer service and the volatility creates more management [responsibilities] .”    

RAISING THE BAR

Hurd says there is a normal growth curve with every CTA. “With Hill Financial we started out with [a minimum of] $ 250 ,000 ; once we got above $10 million [under management] we went to $ 500, 000; once we got above $ 15 million, we raised our minimum to $1 million and once we got to $ 200 million, we closed. That is the standard growth curve with CTAs.”

There are a number of reasons CTAs will raise their minimum investment levels. “Number one [is] if they are good,” Fulton says. If you plan on managing $100 million are you going to take it $50,000 at a time or $1 million at a time, he asks. “There is a big difference between 2,000 accounts and 100 accounts. All back office functions are increased 20 times when you are talking a $ 50,000 account as opposed to $1 million. That is a significant issue. Anyone who meets with success the odds are their minimums will increase based o n these economies of scale,” he adds.

Fulton estimates a single managed account is going to cost between $30 and $50 to manage. “If you have 10 accounts, fine, but if you have 100 accounts, we are not talking chump change anymore. Obviously there is a motivation to keep costs down but also on the trade checking side.”  

Another issue involves rounding. “There are a lot of CTAs out there that define positions on a contract per million basis. When their model sends out a signal it is to buy 1.27 contracts per million of front month soybeans. A million dollar account gets a signal for 1.27 and it is going to round to one contract; a $2 million ac count is going to round to three contracts,” Fulton says.

This can lead to pretty wide discrepancies in returns. “ CTAs will examine different levels of minimums to see the rounding errors are minimized. But you can’t start out on day one asking for $5 million. You don’t want to be in a position where your $500,000 guys and $1 million guys are experiencing performance variance as a result of your rounding,” Fulton says, adding, “Everyone wants $100 million but nobody wants to manage 2,000 accounts to get there.”

DIAMONDS

While most of the CTAs offering low minimum managed accounts tend to be emerging and niche managers, there are some exceptions. Clarke Capital Management, a diversified CTA and one of the most consistently profitable money managers over the last decade, has two programs with a $100,000 minimum investment level or below. Its Global Basic program is offered with a minimum of $50,000 as has produce d a compound annual return of 29.27 % since 1996.

 While the program trades a diversified group of 17 markets, it is usually only in a handful of markets at once so it does not need a large amount of capital for margin. Clarke also has developed sophisticated software to handle the headaches of many smaller accounts. “We developed our own software to handle a lot of accounts. It is difficult in a managed account format to handle [hundreds of] accounts and do it well. Our software has been developed over 15 years and is really smooth at this point and can handle all of those accounts with a very small staff,” Clarke says.

If investors have learned anything in the last year it is the importance of doing your own due diligence. And just as it is true that you cannot rely on “so called” experts to ensure that an investment is on the up and up, you shouldn’t dismiss emerging managers because they are not on the radar screen of these so called experts. There are a lot of diamonds in the rough out there who you can access for under $100,000 — or under $50,000 — that offer diversification and the added safety of managed accounts.