Stocks & Commodities V. 31:10 (47): Futures For You by Carley Garner

Stocks & Commodities V. 31:10 (47): Futures For You by Carley Garner
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Futures For You by Carley Garner


What is a commodity pool? Is this a viable way to get into the commodity markets?

Commodity pools are essentially the mutual funds of the futures industry. By definition, a commodity pool is a private investment structure, typically a limited partnership, that combines the contributions of multiple investors to be used in futures and option trading in the commodity markets. Simply put, a commodity pool is a fund that operates as a single entity to speculate in the futures markets on behalf of the fund’s investors. Another way to look at a commodity pool is as a specialized hedge fund that deals only in futures, or options on futures, traded on organized futures exchanges and is registered as such with the appropriate US regulators.

The term “commodity pool” is a legal word assigned to this type of fund by regulators. Commodity pools are regulated by the Commodity Futures Trading Commission (CFTC) and the National Futures Association (NFA). This is in stark contrast to traditional mutual funds, or even hedge funds, which answer to the Securities Exchange Commission (SEC).

The person, or entity, responsible for managing the commodity pool’s assets and the trading activity within the fund is referred to as the Commodity Pool Operator (CPO). A CPO differs greatly from the alternative form of managed futures, a Commodity Trading Advisor (CTA), in the manner that client funds are allocated and traded. As mentioned, a CPO pools investor funds to create a single trading account. Trades are executed within the commodity pool account with profits and losses allocated to participants based on the size of their contribution to the fund. A CTA, on the other hand, instructs his clients to open individual accounts; any trade executed by the advisor on behalf of his clients is done so directly in each individual client account.

Investors of commodity pools typically opt to participate in the fund with the belief they will have access to markets and trading strategies that they might not otherwise be able to afford based on their contribution size. Similarly, the pooled structure enables investors to share market risk with other investors, making it viable for smaller investors to participate in relatively high-risk trading strategies. The pool investor’s risk is generally limited to the amount of his or her contribution to the fund, but any venture into such an arrangement should include confirmation of risk details.

Although pools can be a great way for small investors to get involved in the commodity markets with relatively little trading capital, there are some glaring drawbacks to pooled arrangements compared to a more traditional CTA-managed account. Here are a few to mention:

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