The second consideration relates to the concept of a lockup period for a managed account or commodity pool. A lock up period commits the investor to a minimum term. It also seems to me to be a red flag. Lockup periods are fairly typical for hedge funds -- particularly those that invest in illiquid assets, such as private equity or real estate. In these cases, a precipitous termination by the investor could come at an inopportune moment, and managers might legitimately feel that they would be able to better serve their investors by having a window of opportunity to exit from their holdings. The length of the lock up period, however, should relate to the degree of liquidity (or illiquidity) of the assets held by the fund. With positions held by CTAs and CPOs being futures contracts and options on futures, managers can easily trade in and out of contracts on virtually any business day. Applying an extended lockup requirement in these situations seems unjustifiable. It is the investors' money, after all.
Conclusion
The inclusion of a professionally managed futures trading program in an otherwise more traditional investment portfolio promises higher risk-adjusted returns; but is this promise truly reliable? In fact, we live in an uncertain world, and there are no guarantees. The desired outcome is predicated upon the returns on the alternative investment being positive and uncorrelated with the returns of the other investment categories. Although these expectations could fail to be realized, appropriate due diligence in connection with manager selection, should lessen the probability of this perverse result.
The CTA or CPO allocation you make in your investment portfolio should apply a strategy or approach that you understand and embrace -- which means being fully cognizant of the character of the performance that is likely to arise over time, warts and all. In this context, past returns clearly aren't necessarily indicative of future returns, and it's useful to point out that records -- both good ones and bad ones -- were made to be broken. A short history of high returns may reasonably attract attention, but it certainly shouldn't be a sufficient selection criterion.
Prospective investors should investigate a prospective manager's background, validate that he or she has have funds at risk in his/her program, and check to make sure that the treatment of expenses and lockup requirements aren't set up to unfairly burden the passive investor(s). There are still no guaranties, but the prospect of a successful experience with alternative assets will be enhanced if you follow this advice.
Ira Kawaller is founder of Kawaller & Co., which assists businesses in their use of derivative instruments to manage financial risk. Previously, he was a vice president-director of the New York Office of the Chicago Mercantile Exchange, where he was responsible for promoting financial futures and options to the professional financial community.