Alternatives for Retail: The Amount of Money Allocated to Alternative Investments, Particularly Hedge Funds and Managed Futures Programs, Has Grown Immensely over the Last Decade but Unfortunately -- and It Is Unfortunate -- Most Retail Sized Investors Do Not Have Access to These Alternatives
Collins, Daniel P., Modern Trader
Public commodity pools are basically the managed futures version of mutual funds. They are sold in increments as low as $ 1,000 and there are few restrictions as to who can invest in them. But that is where the similarities end. Public commodity pools are regulated by a web of regulatory agencies including the Securities and Exchange Commission (SEC), Commodity Futures Trading Commission (CFTC), National Futures Association (NFA), the Financial Industry Regulatory Authority (FINRA, which replaced NASD) and all 50 states. In addition to that burden, the NASD in 2004 reversed a policy exempting public commodity pools from Rule 2810, which limits the level of underwriting compensation for selling agents of all direct participation programs (DPPs, which the pools fall under) to 10% of gross proceeds. This change caused concern in the industry that it would limit the creation of new pools and that selling agents could switch end users to different vehicles once their trail commissions ended.
Investors in public pools are not subject to suitability requirements like "accredited investor" or "qualified purchaser" status, which are required for private placements.
There has been an ongoing debate at the SEC and industry lobbying groups about those requirements. The SEC has wanted to raise the bar because the accredited investor threshold, due to inflation, has grown to include retail participants. They want a higher bar for retail investors to access sophisticated investment vehicles. Many of these private placements are beyond the scope of the retail investor, whether through regulation or simply due to minimum investment levels of several hundred thousand and beyond.
To understand these vehicles an investor must read and sign off on offering material or disclosure documents that often run between 25 to 50 pages. So what does the ultra retail investor--the one too unsophisticated to invest in private alternative investment vehicles even when they are offered within their investment means--have to sign off on? Well, the prospectus for the Frontier Fund family of public commodity funds is 535 pages long. That's right, 535. While lengthy because they encompass multiple funds, typically the offering materials for public pools are much larger and include more complex material than those for private placements.
It is because of this overarching regulatory barrier that most successful alternative investment strategies, managed futures in particular, are out of reach of the retail investor.
It also is the reason why there is not a rush to create additional products for retail. Who wants to pay a minimum of $1 million to go through the hassle of setting up a retail fund and deal with a smorgasbord of regulators including all 50 states? It is a lot easier to set up a private CTA and sell your strategy in $1 million chunks.
"We have a number of retail products," says Walter (Tom) Price III, chairman and CEO of Price Futures Group. But the ruling by NASD (now FINRA) in 2004 that limited trail commissions has affected their offering. Price has closed the Price 1 Fund to new investments and began offering it as a private placement. "You are not going to see any new public funds. As a private fund you can charge anything you want to, you can structure it any way you want, you are not regulated to the extent [public pools] are," Price says.
THOSE WHO DARE
There are, however, a few hardy souls who are venturing into this arena. Christian Baha, founder of Superfund Asset management, launched his retail trend-following managed futures programs in Europe in 1996 and in the United States in 2002. Baha has been a huge advocate for the expansion of retail hedge fund strategies in general and managed futures in particular. "We think that retail needs diversified products that can lower their overall risk and increase their performance at the same time and we can achieve that in the best way with managed futures funds based on systematic trend-following," Baha says. …