Frequently Asked Questions

1. What are Managed Futures and what are their main components?

The term Managed Futures describes an industry made up of professional money managers known as commodity trading advisors or CTAs. Trading advisors manage client assets on a discretionary basis using global futures markets as an investment medium. Trading advisors take positions based on expected profit potential.

• Managed futures accounts can be investments in future-dated contracts for real, physical commodities or financial instruments.
• Commodities can include food, energy, raw materials and financial instruments such as interest rates and stock indices.
• Managed futures are not stocks or ETFs that invest in commodities.

Risks and rewards can be much higher when investing in the futures markets.

Managed Futures are administered by licensed Commodity Trading Advisors (CTAs) or Commodity Pool Operators (CPOs) who are regulated in the United States by the Commodity Futures Trading Commission (CFTC) and the National Futures Association (NFA). However, if the firm or program has an exempt status they are not regulated. A licensed or regulated firm is not an endorsement of favorable performance. Trading futures has risk and is not suitable for everyone.

Some CTAs are paid on a performance-fee basis while others are compensated by charging a commission for each trade that is placed. The CTA can also charge a management fee each year. This cost is usually 1% to 2% of the value of the account.

Investors should review all risks and disclosure documents before investing into a trading program. Brewer Futures Group provides a database of manager information on its website which lists the details of each manger’s programs.

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2. Managed futures accounts include, but are not limited to:

• Individually managed accounts
• Commodity pools and commodity funds.

Managed Futures Accounts are generally managed on the basis of technical and/or fundamental analysis, and involve going long or short in futures contracts in areas such as metals, grains, equity indices and commodities of all kinds. Currency futures are also commonly traded.

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3. Who are the players and participants?

Investment management professionals have been using Managed Futures for over 30 years. Institutional investors such as corporate and public pension funds, banks, endowments and trusts have made Managed Futures part of their well-diversified portfolios.

The growing use of Managed Futures by these investors may be due to increased institutional use of the futures markets. Portfolio managers have become more familiar with futures contracts. Additionally, investors desire greater diversity in their portfolios and seek to increase portfolio exposure to international investments and nonfinancial sectors. This is an objective that is easily accomplished through the use of global futures markets.

Managed futures are operated by licensed Commodity Trading Advisors known as CTAs. They are regulated in the United States by the Commodity Futures Trading Commission (CFTC) and the National Futures Association (NFA).

• Commodity Trading Advisors (CTAs) are responsible for the actual trading of managed accounts.
• Futures Commission Merchants (FCMs) are the brokerage firms that execute, clear and carry CTA-directed trades on the various exchanges.

Investment consultants can be a valuable resource for institutional investors interested in learning about managed futures alternatives and in helping implement a managed program.

Trading managers are available to assist investors in selecting CTAs.

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4. What are the guidelines for evaluating and choosing a CTA and a trading program?

The goal of any due-diligence process is to expose the risks. Once all of the risks are known - then you can assess whether the return is worth the risks involved.

Knowing all of the risks requires knowing which questions to ask. Most investors look at the track record only when performing due diligence, asking questions such as:

• How much money is under management?
• What is the minimum investment?
• What is the correlation with the S&P 500?
• What are the fees?

All of that is important, but it’s only a small part of the overall picture. Don't assume anything about a CTA. Ask the advisor for a copy of the program’s disclosure document. This will enable you to review each month’s trading performance.

Assess the management team. Is it a one person or a corporate-type set up with an infrastructure to grow assets under management? There are definite risks if it is simply one person, like knowing what will happen if the manager becomes ill or even if something more serious were to happen. Research the manager with regulators, references and the brokers they place trades with. Also check the internet to see if there are negative experiences reported on chat boards and blogs.

Examine the breakdown of the strategy beyond what is listed in the Disclosure Document. Know exactly what happened during the worst drawdown phase, what the best and worst types of market environment are for the program, if the strategy has changed over time, and what the manager’s response would be should another 9/11 event occur during market hours.

Find out what normal trading is like for the CTA so you can tell if anything out of the ordinary, and don’t hesitate to call if things ever change.

Extensive due diligence does not insure that an investment won't lose money. Due diligence is purely a method of getting more information than what’s contained in the disclosure document. The due diligence process should be a continued investigation of the CTA's ability to make money and stay away from risks not associated with the strategy.

Additional aspects you may consider reviewing:

• Inter-month drawdown which isn’t normally reported by most CTAs.
• Average commission of the past results and whether the past results include proprietary capital or a pool or fund.
• Does the manager invest his or her own money and that of friends and family?
• How many accounts is the manager managing?
• What is maximum capitalization of the program?

Below is a list of some of the more familiar indexes.

Managed Futures Indexes
(Actively Managed):

• Barclay CTA Index
• CISDM Managed Futures Benchmark Series

Commodity Market Indexes
(Passive):

• Dow Jones-AIG Commodity
• Reuters-CRB Total Return Index

Note, however, that many independent indexing services rely on voluntary submissions from active CTAs, and as such, rankings and/or statistics produced by the indexing services may not include the entire population of active CTAs.

It is also important to examine the program’s risk adjusted return.

Some investors choose to use traditional risk adjusted return measurements to evaluate a program. The most popular of which is the Sharpe ratio. The Sharpe Ratio compares the return relative to the underlying volatility in the investment. However, the Sharpe Ratio only views past volatility and makes no attempt to try and predict future volatility. This limitation results in an inadequate assessment of potential risks for the investor.

A preferred ratio that shows volatility is the Margin to Equity Ratio. The Margin to Equity Ratio shows approximately how much of your investment will be used for margin. This number can vary day-to-day for a manager but when using the Margin to Equity Ratio an investor should be able to verify the average range.

Let’s examine an example of a manager’s Margin to Equity Ratio. If a manager’s Margin to Equity Ratio is 10% this would mean that for every $100,000 invested the manager would put aside roughly $10,000 for margin. Exchanges set margin based on approximations of risk. The higher the exchange perceives the risk in a contract the higher it will adjust the margin requirement. A Margin to Equity Ratio around 10% would be considered conservative. But keep in mind that a low Margin to Equity Ratio does not indicate or guarantee lower risk.

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5. How are fees structured and what types of fees are involved?

Total management fees in the managed futures industry tend to be higher than those in the equity markets. While management fees do vary according to the type of managed futures account and may be negotiable, a general fee structure exists. Investors should fully understand that performance information for a managed futures account or fund is usually expressed net of all such fees.

Typically, the trading advisor or trading manager is compensated by receiving a flat management fee based on assets under management, in addition to a performance or “incentive” fee based on new profits in the account. The performance fee is usually calculated net of all costs to the accounts, such as management fees and commissions. The performance fees is thus based on net trading profits, which are usually paid if the account or program exceeds previously established net asset values.

A few trading managers assume the “netting risk,” whereby the performance results of all trading advisors in the account are netted before the investor is charged a performance fee. The trading manager assumes the netting risk by paying each CTA according to his or her individual performance.

In addition to management and performance fees, an account or fund pays transaction costs and brokerage commissions. These expenses reflect the cost of executing and clearing futures trades and generally are calculated on a round-turn basis.

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6. What kind of investment opportunities exist in the managed futures universe?

The benefits of managed futures within a well-balanced portfolio include the following:

• Potential to lower overall portfolio risk.

The main benefit of adding managed futures to a balanced portfolio is the potential to decrease portfolio volatility. Risk reduction is possible because managed futures can trade across a wide range of global markets that have virtually no long-term correlation to most traditional asset classes. Moreover, managed futures programs have generally performed well during adverse economic or market conditions for stocks and bonds, thereby providing excellent downside protection in most portfolios. But remember, futures and options trading involves substantial risk of loss and is not suitable for every investor.

• Opportunity to enhance overall portfolio returns

While managed futures can decrease portfolio risk, they can also simultaneously enhance overall portfolio performance. Research indicates that adding managed futures to a traditional portfolio improves overall investment quality while also potentially reducing risk. This has been substantiated by an extensive bank of academic research, beginning with the 1983 landmark study by Dr. John Lintner of Harvard University in which he wrote: “The combined portfolios of stocks (or stocks and bonds) after including judicious investments in appropriately selected subportfolios of investments in managed futures accounts (or funds) show substantially less risk at every possible level of expected return than portfolios of stocks (or stock and bonds) alone."^¹

^¹Lintner, John, “The Potential Role of Managed Commodity Financial Futures Accounts (and/or Funds) in Portfolios of Stocks and Bonds,” Annual Conference of Financial Analysts Federation, May 1983.

• Broad diversification opportunities

Managed futures are highly flexible financial instruments traded on many regulated financial and commodity markets around the world. By broadly diversifying across global markets, managed futures can simultaneously profit from price changes in stock, bond, currency and money markets, as well as from diverse commodity markets having virtually no correlation to traditional asset classes. But do your homework. Trading in futures and options carries a substantial risk of loss and is not suitable for every investor. Invest only risk capital.

• Flexibility and discipline

Draw downs, or the reduction a managed futures program might experience during a market retrenchment, are an inevitable part of any investment. However, because managed futures trading advisors can go long or short - and typically adhere to strict stop-loss limits* - managed futures programs may have better opportunities to limit drawdowns more effectively than other traditional investments. Research done by CASAM CISDM in conjunction with the calculation of its CTA Equal Weighted Index shows that drawdowns for managed futures in the period of 1990 through 2008 have been less steep than those for major global equity indices. The CASAM CISDM Index consists of information voluntarily submitted by trading advisors and may not include the activity of every trading advisor. Past performance is not indicative of future results.

*Market and technological conditions may prevent the execution of stop-loss orders. Stop-loss orders cannot prevent losses or draw downs.
• Risk reduction through portfolio diversification
An additional benefit of managed futures includes risk reduction through portfolio diversification by means of negative correlation between asset groups. As an asset class, managed futures programs are largely inversely correlated with stocks and bonds. For example, during periods of inflationary pressure, investing in managed futures programs that track the metals markets (like gold and silver) or foreign currency futures can provide a substantial hedge to the damage such an environment can have on equities and bonds. In other words, if stocks and bonds underperform due to rising inflation concerns, certain managed futures programs might outperform in these same market conditions. Hence, combining managed futures with these other asset groups may optimize your allocation of investment capital.
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7. Managed Futures versus Hedge Funds

Managed futures are considered a type of hedge fund but the differences between managed futures and hedge funds are noteworthy. Managed futures are 100% transparent while hedge funds often leave investors unaware of the holdings of the fund and the actual value of positions are frequently estimated (not marked to market). Holdings of managed futures managers and the corresponding profit/loss of each position can be viewed in real time at anytime.

Managed futures trade in the most liquid marketplaces in the world. Hedge funds often venture into illiquid securities (for example mortgage backed securities or over-the-counter products) that are traded on very few, if any, exchanges. Because of this liquidity, managed futures investors can generally request funds from their managed account at anytime, but individual program requirements will vary.

8. Managed Futures versus Mutual Funds

Trading & Performance	Mutual Funds	Managed Futures
Professionally managed	X	X
Trillions of dollars transacted everyday	X	X
Can be long, short, or market neutral		X
Investor Protection	Mutual Funds	Managed Futures
Regulated by governmental agencies	X	X
Invested in by pensions, endowments, and other institutions	X	X
Can be diversified over hundreds of instruments	X	X
Account Management	Mutual Funds	Managed Futures
Complete disclosure documents	X	X
Live brokers to assist with issues	X	X
Real-time liquidity		X
100% transparency		X
Segregated accounts		X
Real-time updates		X
Undiluted return		X
Generally, no transfer or liquidation fees*		X
*Consult CTA disclosure documents for specific fee information

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9. Potential Tax Benefits versus Stocks

According to the Tax Act of 1981, short-term profits in futures are treated as 60% long-term (therefore being subject to a maximum tax of 15%), and 40% short-term (normal taxable income). On the other hand, short-term trading profits in stocks (stocks held less than one year) are treated as 100% short-term.

This favorable tax treatment for futures can translate for those in the upper tax brackets, saving as much as 30% on taxes on short-term gains in futures versus stocks. However, alternative investments such as managed futures are not suitable for all investors.

Brewer Investment Group recommends managed futures only be used with speculative capital, and that the investment not exceed 20% of investable assets or 10% of a client’s overall net worth.

We also strongly recommended that any investment tax considerations should be reviewed with a qualified tax professional prior to investing.

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10. Transparency of the global industry

Managed futures accounts, like all other accounts of customers doing business through a U.S. exchange, must be executed by and carried on the books of a “clearing member” (a brokerage firm or FCM that holds a membership in an exchange’s clearing organization).

Once a trade between two clearing members is matched by the exchange, the rights and obligations under the futures or options contract do not run between the original buyer and seller; instead, they are between the seller and the clearing organization and the buyer and the clearing organization. An exchange’s clearing organization guarantees performance on every contract to each of its clearing members.

And although each exchange’s clearing function operates a bit differently, at minimum they all ensure that there are sufficient resources to meet obligations by:

• Collecting performance bonds
• Marking contracts to the market at least once daily
• Establishing capital requirements and maintaining minimum financial standards for clearing member
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11. Can I invest funds from my Individual Retirement Account (“IRA”)?

Yes, there are IRA trust custodians who accept futures accounts; they are referred to as self-directed IRAs. If you do not already have a self-directed IRA which accepts futures trading, you will have to open one with a trust custodian that does. Your broker can offer assistance with this process.

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12. Where is the money deposited when a managed futures account is opened?

When you open an account, the funds in your account will be maintained in a customer segregated funds account at a Futures Commission Merchant (FCM) for the purposes of trading and furthermore they are segregated on the books of the FCM, meaning that the funds in your account are separated from the firm's operating accounts and are strictly deposited in a bank account that only contains customer monies.

The bank is required to acknowledge in a letter to the FCM that the specified account is customer segregated funds. If the FCM were to face financial trouble, the customer's funds would not be held to meet the firm's liability.

Individual client funds typically are held in the same bank account, though separate from the FCM’s funds, and the firm simply keeps track of the amount being held for each client. With a non-clearing FCM, the segregated funds are transferred to a clearing FCM that deposits them in a segregated account. Properly administered segregation practices have served futures customers quite successfully, but segregation does have limitations which your FCM can explain in detail. In addition, segregation cannot protect against trading losses. As for customers who place more money with the FCM than is necessary to meet their immediate margin requirements for any margin calls required by changes in a trading position their funds are either are held as cash, or the client can put up U.S. securities with interest income benefiting either the FCM or the customer. Government securities can be used because they can be quickly converted into cash.

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13. How do I open an account if I decide to proceed?

It is very simple to open a futures account with Brewer Futures Group. You can open an individual or joint account electronically in a matter of minutes just by going to our website, which is www.BrewerFuturesGroup.com and clicking on the “Open an Account” tab. Other options are to download forms from our site or we can also mail you the account forms needed to establish your account. You must read and understand the risk disclosures and contractual agreement required to open an account.

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14. Additional Information

Managed Futures Outperforming the Market
(source: www.iasg.com; March 31, 2009)


“From retail traders to endowment-managing institutions, more and more investors have flocked to Managed Futures due to their low or negative correlation to the worst performing equity markets in decades. Indeed, some savvy investment managers have profited during this time of crisis, many of whom rode downward trends or employed innovative, non-directional strategies like spread trading. These Managed Futures programs have therefore offered the opportunity to not only outperform traditional investment strategies, but profit when the majority of mutual funds have lost.

While Managed Futures has developed in the public's eye for some time, what has really stood out in 2008-9 is the negative correlation: the CISDM CTA Equal Weighted Index–– which tracks the average performance of Commodity Trading Advisors (CTAs) reporting to the Center for International Securities and Derivatives Markets Hedge Fund/CTA Database––has performed 11.57% YTD while equity markets have declined at the fastest pace since the Great Depression. Taking another example, in October 2008 the S&P 500 lost 16.79%, the average hedge fund lost 6.4%, but the CISDM CTA Asset Weighted Systematic Index Managed Futures program made 5.65%. One continuing benefit of investing in Managed Futures, particularly for institutional investors, is the availability of leverage for investing while credit remains thin in traditional investment strategies. Of course, the use of leverage can lead to larger losses as well as gains…

…The presence of non-directional strategies and leverage has enabled some investment managers and their respective investors to outperform bear markets. Many global markets, a strict regulatory environment and low correlations have all added to the appeal of Managed Futures to the average and institutional investor alike. Managed Futures has thus offered investors unique opportunities during otherwise inopportune times.”

www.iasg.com; March 31, 2009

NOTE: The CISDM CTA Equal Weighted Index mentioned in the above quotation is an index calculated from voluntary submissions of performance data by CTAs. The index may not include the entire population of active CTAs. Past performance is not indicative of future results.

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2008 Asset Class Performance

All results estimates as of 12/31/08. Past performance is not indicative of future results.

Asset Class	2008 Performance
Managed Futures	17.59%
Bonds	2.93%
Cash	0.08%
Hedge Funds	-20.72%
Commodities	-23.74%
US Stocks	-38.41%
World Stocks	-42.08%
Real Estate	-43.12%

Managed Futures = Credit Suisse/Tremont Managed Futures Index
Cash = 3-month T-Bill rate
Bonds = Vanguard Total Bond Market ETF
Hedge Funds = Credit Suisse/Tremont Hedge Index
Commodities = Reuters/CRB Commodity Index
Real Estate = Dow Jones Wilshire Real Estate Securities Index
World Stocks = MCSI World Index
US Stocks = S&P 500 Index


NOTE: Measures of managed futures performance data by third-party indexing services are based on the voluntary submissions of performance data from CTAs and may not include the entire population of active CTAs. Past performance is not indicative of future results.

DISCLAIMER:Futures and options trading involves substantial risk of loss and is not suitable for every investor. The valuation of futures and options may fluctuate, and, as a result, clients may lose more than their original investment. The impact of seasonal and geopolitical events is already factored into market prices. In no event should the content of this correspondence be construed as an express or implied promise, guarantee or implication by or from Brewer Futures Group, LLC, Brewer Investment Group, LLC, or their subsidiaries and affiliates that you will profit or that losses can or will be limited in any manner whatsoever. Past results are no indication of future performance. Information provided in this correspondence is intended solely for informational purposes and is obtained from sources believed to be reliable. Information is in no way guaranteed. No guarantee of any kind is implied or possible where projections of future conditions are attempted. Invest only risk capital.

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