Alternative investments changed more since I started in the industry in 2008 than I ever thought possible. One might think that the “AI Revolution” or more sophisticated computer power created a vast array of totally different return profiles, but instead, the big surprise is the ability for everyday investors to access non-traditional products. While regulators seem slow to catch up, the idea that a unique strategy is automatically riskier is one that more investors disagree with all the time. Traders continue to offer more access points, which helps their customers and their asset growth. I expect that technology and third-party providers will continue to push this transition. Here are a few considerations both CTAs and investors can currently look at.
Traditional Fund Allocations
Most of the alternative investment world is still predominantly run through fund allocations. These setups are relatively simple, with one pool of capital traded in a single or multiple strategies. New investors can invest at lower amounts for the same returns as the largest investor. Formats include mutual funds, limited partnerships, and more. Drawbacks often included high-cost structures, questionable valuations, and long setup times. More often, we now see common third-party providers across these options. This streamlines the process, inspires investor confidence in the reporting, and reduces fees since they work with large volumes of various funds. This makes funds more appealing for newer CTAs who might have skipped this option previously. The limited partnership structure is the most common one for most programs initially. As assets under management grow, they often look to these next options.
Managed Account Platforms
Managed account platforms offer a choice to launch fund-like products like those above in a consistent format. As covered in our article from 2022, Managed Account Platforms: An Easy Way to Invest, these structures target multiple audiences. Institutional investors make up most of the assets for the largest CTAs in the world. This makes these programs difficult to reach for most investors. A managed account platform can work with one large customer to open a “cell” on the platform at a high minimum investment, which is often $10 million or more. Once that is complete, smaller investors can enter with as little as $100k. Many of these platforms use internal and external legal, accounting, and banking relationships to facilitate trading. This level of monitoring satisfies many large pension funds and endowments and works well as a basis for a futures mutual fund. We see many programs from inside and outside of the United States use this route to create a US onshore fund that complies with the regulatory hurdles inherent in our country.
Exchange-Traded Mutual Funds (ETFs)
Launching an exchange-traded mutual fund or an ETF is not for the faint of heart. These products are available to anyone and incur the highest regulatory scrutiny before launching. This makes the upfront and ongoing compliance costs very high. This means that getting significant assets in quickly to cover daily operations is important. Many successful companies in this sector offer many products and have dedicated sales teams selling into multiple channels, including financial advisors, broker-dealers, and institutional allocators. If the mutual fund resonates, it can grow quickly and become a common fixture across many portfolios. This is great news for investors of limited means that might not hit the normal accredited investor requirements or minimum investment sizes. Sadly, the inherent costs and enormous assets required for profitability create some trade-offs. Often, less liquid markets get overlooked as trading them with hundreds of millions of dollars is not realistic. Overhead is higher than many private funds for reporting purposes so they trail the private versions of the same strategy. Finally, intraday or even daily liquidity forces buying and selling at inopportune times to satisfy money movement. This can hurt those who buy and hold despite this often being the best practice.
Separately Managed Accounts
The final option is a separately managed account. These offer full transparency into every trade and every penny that moves within the account. Often, these require large minimum investments, but investors like the ability to monitor their accounts, cross margin to maximize cash efficiency, and combine strategies in a cohesive format. For obvious reasons, they became more popular following the Madoff scandal. In that case, he traded a fund, and his firm did all the trading, accounting, and production of statements. We understandably look for full transparency or reputable third parties looking over our accounts these days. Thankfully, technology is helping providers scale, which makes outsourcing more affordable than ever.
Here are some of the considerations for investors and traders:
| Type | Setup | Cost | Assets | Leverage | Transparency | Perf Calc | Owner | Min Inv |
| Private Fund | Med | Medium | Medium | No | Little (often) | Monthly | Provider | Med |
| Platform | Med/Short | Med/Low | High | Yes | Med | Daily | Platform | Med |
| Mutual Fund/ETF | Long | V. high | V. High | No | Mixed | Daily/Live | Provider | Low |
| Separate Account | Short | Minimal | Minimal | Yes | Full | Live/ Monthly | Investor | High |
While we wait for the forthcoming “AI Revolution,” we can continue to focus on the new avenues that are available to us to achieve diversification in our portfolios. With more options than ever, big and small investors can find a path that fits their needs. Hopefully, the time and cost to set up each of these options will continue to come down. One might hope the regulatory hurdles will also become easier, but we can take the private sector wins first. If you are a CTA looking to launch a fund or an investor who wants to understand your investment options, do not hesitate to contact us. We would be happy to help guide you.