A Commodity trading advisor (CTA) is US financial regulatory term for an individual or organization who is retained by a fund or individual client to provide advice and services related to trading in futures contracts, commodity options and/or swaps. They are responsible for the trading within managed futures accounts. The definition of CTA may also apply to investment advisors for hedge funds and private funds including mutual funds and exchange-traded funds in certain cases.
A CTA generally acts as an asset manager, following a set of investment strategies utilizing futures contracts and options on futures contracts on a wide variety of physical goods such as agricultural products, forest products, metals, and energy, plus derivative contracts on financial instruments such as indices, bonds, and currencies. The trading programs employed by CTAs can be characterized by their market strategy, whether trend following or market neutral, and the market segment, such as financial, agricultural or currency.
There are three major styles of investment employed by CTAs: technical, fundamental, and quantitative. Technical traders invest after analysing chart patterns. They often employ partially automated systems, such as computer software programs, to follow price trends, perform technical analysis, and execute trades. Successful trend following, or using technical analysis techniques to capture swings in markets may drive a CTA’s performance and activity to a large degree. In 2010, Dr. Galen Burghardt, adjunct professor at the University of Chicago’s Booth School of Business, found a correlation of 0.97 between a subset of trend following CTAs and a broader CTA index from the period 2000-2009, indicating that speculative technical trend following had been dominant within the CTA community. Fundamental traders attempt to forecast prices by analyzing supply and demand factors, amongst other market information, in their attempt to realize profits. Other non-trend following CTAs include short-term traders, spread trading and individual market specialists. Fundamental CTA’s typically invest based on analysis of the core markets they are trading, by analysing weather patterns, farm yields, understanding oil drilling volumes etc. Quantitative CTA’s do statistical or quantitative analysis on market price patterns and try to make predictions based on such research. Many Quantitative CTA’s have backgrounds in Science, mathematics, statistics and engineering.