The Small Account Conundrum

7/31/2019 The Small Account Conundrum

1/4

The Small Futures Account Conundrum By DeanHoffmanwww.hoffmantrading.com

I recently scanned a Commodity Trading Advisor Data base to look at minimum accountsizes and found minimum account sizes ranging from $25,000 to $5,000,000. I found thetypical CTA trading a small minimum account size had a concentrated portfolio, highmargin requirements, little money under management, a short track record, high volatilityor was trading just options. Diversified trend followers seemed to have minimums thatwere usually at least $1 Million.

Small accounts in the futures markets (less than $250,000) face a considerable number ofchallenges not experienced by large accounts. Considering that most commodity futurescontracts have face values in the tens or hundreds of thousands of dollars its easy tosurmise that these contracts were designed for large accounts. However, low marginrequirementshave long attracted smaller speculators and have been the proverbial ropeto hang one self with.

Lets analyze why large accountsmay have it easier than small accounts. First, largeaccounts can afford to trade virtually any opportunity at any time. There are over 100tradable commodity markets worldwide, and should buy or sell opportunitiessimultaneously exist in any or all of them a large account can easily afford the marginand exposure to trade them all. It has been said that that when it comes to investing thatdiversification is the only free lunch and large accounts can afford to diversify withimpunity. This is in stark contrast to the small accountwhere prudence dictates onlyhaving risk and exposure in a limited number of markets simultaneously.

Furthermore, a large account is not restricted from trading contracts whose volatility isrelatively high. For example, a London copper trade with a stop loss $14,000 awayrepresents risk of 1.4% in a million dollar account. However, in a $100,000 account thissame trade would represent risk of a whopping 14%! Of course any sensible trader wouldavoid that trade in such a small account; however, having to skip these opportunities isyet another penalty paid by the small account.

Whats more, the large account can utilize one of the easiest forms of risk controlavailable, contract scaling. For example, lets assume a large account is long 50 goldcontracts during a large bull market run and wishes to reduce his open trade profitexposure. He can simply scale off however many contracts he needs in order to lock in

profit, while simultaneously maintaining his profitable position. However, what can thesmall account do in terms of scaling out if he only has on one contract in the first place!?Once again, the small account does not enjoy the flexibility to control risk in the samefashion as the large account.

Now, for all of the negativity Ive just outlined above I actually believe the smalleraccount can have a significant advantage over large ones. Small accounts are able toefficiently trade markets that would be far too illiquid for large accounts. Most
http://www.hoffmantrading.com/


2/4

institutional size funds are virtually confined to only trading financial and energyinstruments and miss out on trading opportunities in the more traditional physicalcommodity markets. Specifically commodities like Grains, Foods, and Fibers etc. Thiscreates a lack of diversification and an over reliance on those limited sectors. The ironicthing is that many small accounts end up with the same problem because they have

chosen to deal with their small account problem by only trading a few (or one) market!They end up missing out on the sharpest edge they have on the big boys.

Fortunately, it is for those smaller traders who want the advantages of true globaldiversification that Hoffman Asset Management Inc. was formed. HAMI is carving out aunique niche by offering a trading program that monitors and trades over 70 diversifiedcommodity markets, yet is designed to trade accounts as small as $125,000. Furthermore,the program has been designed to attempt to keep draw downs and volatility in line withwhat might be available in a very large widely diversified account*. This combination oftrading a large number of markets within a small account while keeping volatility incheckis truly unique and fills what we feel is a tremendous void in traditional managed

account offerings.

Obviously the exact nature of what we do is proprietary; however the basic premise isbased on the concept of relativity. HAMI monitors a very large universe of tradablecommodities for opportunities, yet, is highly selective in those trades that it will take. Forapproximately every 5 trading opportunities identified by HAMIs combination of over10 trading systems, only 1 will be taken. Our algorithms are not only considering themarkets direction and movement potential but just as importantly, how that potentialranks on a risk adjusted basis. The idea is that an opportunity can only be evaluatedrelative to what else is available. For example, how would you know if earning 5% wasgood or bad? The answer should be it depends on what else is available. In other

words, the 5% return is only good or badrelative

to other options. What HAMI Incs.strategy attempts to do is identify a limited percentile of all the markets it tracks as beingthe best candidates. Then, only those markets will be considered should one of our manysystems generate a signal.

The portfolio selection process is dynamic and rebalanced every day. This means thatfromday to day the basket of markets that we will consider trading changes. We feel thiskeeps our trades limited to only those markets with the best risk adjusted potential. Thisallows us to evaluate a very large portfolio while still keeping the number of trades andmargin requirements very low.

Monitoring a very large portfolio is critically important because if you initially limityourself to a predetermined small portfolio, how do you know that those markets will bethe best markets in the future? (Hindsight bias portfolio selection is a form of curvefitting and is a major downfall of many traders). If an exceptional opportunity develops ina market outside of your predetermined portfolio wouldnt you want to take advantage ofit? By trading with our strategies you dont arbitrarily rule out any market that mayperform well in the future andyou have eliminated the tendency to pick a portfolio basedmerely on past performance (curve fit) considerations. The key is researched logic that


3/4

can do this automatically and thats what Hoffman Asset Management Inc. tradingstrategy utilizes.

*Hoffman Asset Management Inc. attempts to limit risk but no guarantees to limit lossesto a certain percentage can be made.

RISK DISCLOSURE STATEMENT AND DISCLAIMER

PAST RESULTS ARE NOT NECESSARILY INDICATIVE OF FUTURE RESULTS.

THE RISK OF LOSS IN TRADING COMMODITIES CAN BE SUBSTANTIAL. YOU SHOULD

THEREFORE CAREFULLY CONSIDER WHETHER SUCH TRADING IS SUITABLE FOR YOU

IN LIGHT OF YOUR FINANCIAL CONDITION.

THE HIGH DEGREE OF LEVERAGE THAT IS OFTEN OBTAINABLE IN COMMODITY

TRADING CAN WORK AGAINST YOU AS WELL AS FOR YOU. THE USE OF LEVERAGECAN LEAD TO LARGE LOSSES AS WELL AS GAINS.

IN SOME CASES, MANAGED COMMODITY ACCOUNTS ARE SUBJECT TO SUBSTANTIAL

CHARGES FOR MANAGEMENT AND ADVISORY FEES. IT MAY BE NECESSARY FOR

THOSE ACCOUNTS THAT ARE SUBJECT TO THESE CHARGES TO MAKE SUBSTANTIAL

TRADING PROFITS TO AVOID DEPLETION OR EXHAUSTION OF THEIR ASSETS. THE

DISCLOSURE DOCUMENT CONTAINS A COMPLETE DESCRIPTION OF THE PRINCIPAL

RISK FACTORS AND EACH FEE TO BE CHARGED TO YOUR ACCOUNT BY THE

COMMODITY TRADING ADVISOR (``CTA'').

THE REGULATIONS OF THE COMMODITY FUTURES TRADING COMMISSION (``CFTC'')

REQUIRE THAT PROSPECTIVE CLIENTS OF A CTA RECEIVE A DISCLOSURE

DOCUMENT WHEN THEY ARE SOLICITED BY THE CTA TO ENTER INTO ANAGREEMENT WHEREBY THE CTA WILL DIRECT OR GUIDE THE CLIENT'S

COMMODITY INTEREST TRADING AND THAT CERTAIN RISK FACTORS BE

HIGHLIGHTED. DISCLOSURE DOCUMENTS FOR SOME CTAs ARE READILY

ACCESSIBLE AT THIS SITE. YOU WILL NOT INCUR ANY CHARGES BY ACCESSING

THESE DISCLOSURE DOCUMENTS. YOU MAY ALSO REQUEST DELIVERY OF A HARD

COPY OF THE DISCLOSURE DOCUMENT, WHICH THE CTA WILL PROVIDE TO YOU AT

NO COST.

THIS BRIEF STATEMENT CANNOT DISCLOSE ALL OF THE RISKS AND OTHER

SIGNIFICANT ASPECTS OF THE COMMODITY MARKETS. THEREFORE, YOU SHOULD

REVIEW THE CTA'S DISCLOSURE DOCUMENT AND STUDY IT CAREFULLY TO

DETERMINE WHETHER SUCH TRADING IS APPROPRIATE FOR YOU IN LIGHT OF YOUR

FINANCIAL CONDITION. THE CFTC HAS NOT PASSED UPON THE MERITS OFPARTICIPATING IN THE TRADING PROGRAMS DESCRIBED ON THIS WEBSITE NOR ON

THE ADEQUACY OR ACCURACY OF THE CTA'S DISCLOSURE DOCUMENT.

OTHER DISCLOSURE STATEMENTS ARE REQUIRED TO BE PROVIDED YOU BEFORE A

COMMODITY ACCOUNT MAY BE OPENED FOR YOU.

THE INFORMATION CONTAINED HERE HAS BEEN PREPARED FROM SOURCES

DEEMED RELIABLE, BUT WE DO NOT GUARANTEE THE ADEQUACY, ACCURACY OR


4/4

COMPLETENESS OF ANY INFORMATION. NEITHER HAMI NOR ANY OF ITS RESPECTIVE

AFFILIATES, OFFICERS, DIRECTORS, AGENTS AND EMPLOYEES MAKE ANY

WARRANTY, EXPRESS OR IMPLIED, OF ANY KIND WHATSOEVER, AND NONE OF THESE

PARTIES SHALL BE LIABLE FOR ANY LOSSES, DAMAGES, OR COSTS, RELATING TO

THE ADEQUACY, ACCURACY OR COMPLETENESS OF ANY INFORMATION ON THIS

REPORT.

Documents

The Small Account Conundrum