Commodity trading advisor
Encyclopedia
A commodity trading advisor (CTA) is an asset manager who follows a set of systematic investment strategies in futures contract
s and options
on futures contracts. The advisors originally operated predominantly in commodities markets, but today they invest in any liquid futures market. They are responsible for the trading of managed futures account
s. There are approximately 800 CTAs registered with the National Futures Association
(NFA), the self-regulatory organization
for futures and options markets in the U.S.
The two major types of advisors are technical traders and fundamental traders. Technical traders may use computer software
programs to follow price trends and perform quantitative analysis. Trend following
, or using technical analysis to follow swings in the markets, drives CTA performance and activity to a large degree. In a recent interview, Professor Galen Burghardt, adjunct professor at the University of Chicago's Booth School of Business
, shows this by tracking a subset of trend following CTAs and compares them with a broader CTA index (from the period 2000-2009), finding a correlation of .97 between the two groups, showing how large the impact of trend following is in the CTA business.
Fundamental traders forecast
prices by doing the analysis of supply and demand
factors and other market information.
of the trade. The trading, however, was completely unregulated, and a common platform to exchange the ownership rights was established as late as in 1730 in Japan. After the introduction of standardised financial futures contracts in the 1970s, futures trading on speculative purposes grew larger than the original idea of hedging the risks, and the CTAs were born.
Futures contract
In finance, a futures contract is a standardized contract between two parties to exchange a specified asset of standardized quantity and quality for a price agreed today with delivery occurring at a specified future date, the delivery date. The contracts are traded on a futures exchange...
s and options
Option (finance)
In finance, an option is a derivative financial instrument that specifies a contract between two parties for a future transaction on an asset at a reference price. The buyer of the option gains the right, but not the obligation, to engage in that transaction, while the seller incurs the...
on futures contracts. The advisors originally operated predominantly in commodities markets, but today they invest in any liquid futures market. They are responsible for the trading of managed futures account
Managed Futures Account
A managed futures account or managed futures fund is a type of alternative investment. Managed futures accounts include, but are not limited to, commodity pools and commodity funds...
s. There are approximately 800 CTAs registered with the National Futures Association
National Futures Association
The National Futures Association is an independent self-regulatory organization and watchdog of the commodities and futures industry in the United States. The NFA oversees and protects investors from fraudulent commodities and futures activities. The NFA also provides mediation and arbitration...
(NFA), the self-regulatory organization
Self-regulatory organization
A self-regulatory organization is an organization that exercises some degree of regulatory authority over an industry or profession. The regulatory authority could be applied in addition to some form of government regulation, or it could fill the vacuum of an absence of government oversight and...
for futures and options markets in the U.S.
The two major types of advisors are technical traders and fundamental traders. Technical traders may use computer software
Computer software
Computer software, or just software, is a collection of computer programs and related data that provide the instructions for telling a computer what to do and how to do it....
programs to follow price trends and perform quantitative analysis. Trend following
Trend following
Trend following is an investment strategy that tries to take advantage of long-term moves that seem to play out in various markets. The strategy aims to work on the market trend mechanism and take benefit from both sides of the market, enjoying the profits from the ups and downs of the stock or...
, or using technical analysis to follow swings in the markets, drives CTA performance and activity to a large degree. In a recent interview, Professor Galen Burghardt, adjunct professor at the University of Chicago's Booth School of Business
Booth School of Business
The University of Chicago Booth School of Business is a graduate business school located in Chicago, Illinois, at the University of Chicago. Formerly known as the University of Chicago Graduate School of Business, Chicago Booth is the second oldest business school in the U.S., the first such school...
, shows this by tracking a subset of trend following CTAs and compares them with a broader CTA index (from the period 2000-2009), finding a correlation of .97 between the two groups, showing how large the impact of trend following is in the CTA business.
Fundamental traders forecast
Forecasting
Forecasting is the process of making statements about events whose actual outcomes have not yet been observed. A commonplace example might be estimation for some variable of interest at some specified future date. Prediction is a similar, but more general term...
prices by doing the analysis of supply and demand
Supply and demand
Supply and demand is an economic model of price determination in a market. It concludes that in a competitive market, the unit price for a particular good will vary until it settles at a point where the quantity demanded by consumers will equal the quantity supplied by producers , resulting in an...
factors and other market information.
History
The first uses of futures goes back in time thousands of years, where local merchants bought exclusive use for farmers’ crops before the harvest. The farmers were able to reduce their risks by getting a fixed price regardless of the success of the harvest, leaving the businessmen exposed to the volatilityVolatility (finance)
In finance, volatility is a measure for variation of price of a financial instrument over time. Historic volatility is derived from time series of past market prices...
of the trade. The trading, however, was completely unregulated, and a common platform to exchange the ownership rights was established as late as in 1730 in Japan. After the introduction of standardised financial futures contracts in the 1970s, futures trading on speculative purposes grew larger than the original idea of hedging the risks, and the CTAs were born.