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The Problem With Managed Futures, Pt 3 – The Gorgeous Model Had a Decent Upbringing!
When my dad first saw my burgeoning interest in the opposite sex he told me to “always look at a girl’s roots to determine how she’ll grow”. My grandfather would add, “If you want to know where she’s going find out where she’s been.” Now, here, I have to tell you that I was probably about eight years old at the time. I’m sure I had a look of absolute confusion on my face. It was that way quite often with my dad and my grandfather until I was about 12…Great pearls of wisdom, less than timely delivery. I do have very good memories of both men though!
I’ve reflected on those particular nuggets many, many times over the years. Not just in seeking female companionship, but, in varied other walks of my life as well. Think about all the missteps you’ve taken in life. What if you had taken a moment or two to consider the source? What if you had pumped your brakes and traced the person, situation or circumstance back to it’s origins, and determined how it came to be what you were experiencing at your particular moment of intersection. How different would your outcome have been? How would the change have positively impacted your life today? Hmmm…
My friend the model comes from a very solid home. Her father is a retired banker, and her mom was the principal at a junior high school. She has a brother that’s a pharmacist, and a younger sister that’s a chiropractor. Her parents have been married for more than 50 years. Any story she has ever related to me about her family has been like a Norman Rockwell painting. By all accounts she had a happy, mind-numbingly normal childhood. It made my mildly dysfunctional upbringing seem like a real tragedy at times.
While it wasn’t important for me to meet her parents (we were honestly just friends), it was certainly a welcomed treat. At the time it gave me a special insight into the person that she was at 19, and the woman that she would ultimately become. And, I have to say; she fulfilled the promise quite handsomely. It was clear, even then, that she was the absolute apple of her daddy’s eye. He was, at first, a bit reticent and standoffish with me. Probably because he assumed that I was intimate with his little girl. But, once he determined the true nature of our friendship he was somewhat relieved. It helped that we were also fraternity brothers. It also helped that I, even then, was completely candid with him. I sensed the source of his somewhat curt manner and told him, in no uncertain terms, that I wasn’t sleeping with his daughter, and had no intent. We still remain friends!
I could tell almost instantly that her dad was a no-nonsense, law and order type. He politely grilled me on my past, my city of birth, my parents’ occupations and my career aspirations. I have to admit getting to know her mom and dad, and seeing their interaction made me understand so much about my lifelong friend. I find that I get her today because of that insight so many years ago. For most investors the traditional investment choices, stocks, bonds, mutual funds don’t really require an introspective look into their past. They’ve been around for so long, and are so firmly ingrained into the psyche of American investors that most don’t even know what they’re actually into a good percentage of the time. It’s enough to know that they’re players in the game. ETF’s were the biggest beneficiary of this blind date mentality. The sizzle was incredible. Investors rushed after them in droves.
The problem was most didn’t understand that the roots of ETF’s is basically stock market investing. Things like counterparty risk, insolvency, and high expense ratios can affect ETF’s just like stocks. Bid/Ask spreads can greatly affect returns with ETF’s. Most investors are clueless about such things, and yet they persist! I sometimes wonder how something like ETF’s can become the “it” girl and the public remain basically ignorant of the details while commodity futures, which have been around since the 1800’s, can still be thought of as “exotic” or “alternative” by many.
Herein lies part of the rub with commodities: most don’t know the origins or upbringing of the commodity markets. They don’t understand that the commodity markets in the U.S. are as American as Ford Motor Company (and, at least 50 years older!) Many of the concepts that were devised and adopted in the early U.S. futures trading exchanges and markets are still the standard for worldwide markets today, and, have transcended into other business models in various industries. The commodity markets were, in no small measure, responsible for developments in interstate and international trade, warehousing, transportation, merchandising logistics and financing.
Much like my model friend commodities have a very solid background steeped in a stringent rules-based rearing. The regulatory environment can be traced almost to the very inception of the exchanges in New York and Chicago. The founders saw early need for orderly, uniform transactions, with standardized contracts. Consequently, from inception, the futures markets have experienced far less scandal and corruption. Even when the Hunt Brothers attempted to corner the Silver market in the 70’s the CFTC was on top of the situation with lightning fast alacrity.
By some measures the amount of regulation and oversight in the commodity futures markets is said to be attributed to the volume and scope of trading that takes place as a normal daily course of business. Others contend that the watchdogs work overtime due to the leverage that is inherent to commodity trading. Frankly, I’ve never given much thought to one argument over the other because whichever side you come out on the fact remains: the sheriff is ALWAYS, ALWAYS, ALWAYS on duty in the global commodity markets. As I go through my normal day-to-day activity I get the question/concern regularly. “Is this a possible Madoff scam?” Bernie Madoff, for a number of reasons, could never ever have pulled off his scheme if her were a commodity trading advisor.
The average investor has no idea of the “normal” regulatory measures that exist in commodity futures trading. Aside from being 100% transparent, commodity accounts are segregated by statute. What that means is, they are not ever commingled with a company’s funds or even any other client’s funds. When you open a Managed Futures account your funds are placed in a custodian bank in an account in your name only! The money manager(s), servicing broker, introducing brokerage never have access to your funds under any circumstances!!! This is in compliance with Section 4d of the Commodity Exchange Act and CFTC Regulations (www.CFTC.gov) No “Madoff” here!
As I mentioned transparency, Managed Futures accounts are “marked-to-market” daily. Additionally, each and every transaction generates a transaction summary statement. Clients can opt to receive their summaries via U.S. Postal mail or email, or both. The summaries will typically include the specific activity along with a thorough accounting of all associated charges and fees, to the penny, literally! At the end of every month you’ll receive a month-end accounting of all activity and fees for the month. The Month-end statement will also show all existing positions (those in your account prior to the month in question), cash value of all position, cash balance, margin exposure (if any), and liquidation value. Some clients see it as information overload! I say, better too much than too little! After all, it’s your money!
Every player in the Managed Futures process has to submit to an FBI background investigation to be, in any fashion, in the process. The process starts with a test, the Series 3 licensing exam. Once a broker passes the exam he/she must complete and submit a book of personal information. In this book a prospective broker must account for his employment and addresses for the last ten years, and must thoroughly explain any gaps. The potential employer/brokerage must verify all past jobs. The prospect must also answer questions as to arrests and convictions, bonding, bankruptcy, corporate/personal financial malfeasance, and past positions of fiduciary responsibility. Typically, the brokerage and/or its associated FCM (Futures Commission Merchant or “Clearing House”) has a compliance department that determines a broker’s worthiness before the process is forwarded to the regulatory body, the NFA (www.NFA.Futures.org) for approval. You can look up the regulatory and industry employment history of any broker, brokerage, FCM, CTA or Commodity Money Management firm on the NFA’s website.
The NFA is the self-regulatory body that is mandated by congress to be the watchdog of the industry. Every person is subject to review and regulation by the NFA. Their sole mission in life is to catch wrongdoing amongst its member organizations! Well, that might be a bit extreme. However, the NFA is quite good at their function! Additionally they also must pass on all marketing efforts. Their approval process extends to anything that a broker or brokerage says, prints, purports or presents. Most prominently, the performance information for all Managed Futures programs, and the federally required Disclosure Document must stand up to very stringent audit! Brokers/brokerages are strictly forbidden from presenting performance information until it has been independently audited every month. You can absolutely trust the numbers for Managed Futures programs! The brokers’ and CTA’s livelihood depends on this integrity. Very few, if any, are willing to run afoul of the NFA!
As is true of my beautiful friend, Managed Futures offer a very profound and thorough “law and order” background. As with any potential investment, it’s best to know not only the real nature of the offering but also the pedigree of those that offer it! Do a little homework on Managed Futures. It could possibly pay big dividends for your portfolio!
Next… The Gorgeous Model Can Be Quite Resourceful!
Investment in futures can involve substantial risk, and is not suitable for every investor. Only truly risk capital should be used for futures investing. Past performance is not necessarily indicative of future results.
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