Start a CPO
All you need to know about Comodity Trading Advisors & Comodity Pool Operators

Questions and Answers

What is the definition of a commodity pool?

An enterprise in which several individuals contribute funds in order to trade futures or futures options collectively. Commodity pools are analogous to mutual funds in that many investors pool their assets to gain the power to make trades that they could not make individually. Additional benefits include bypassing margin requirements and limiting risk to the amount invested in the pool.

What are the various regulatory requirements to starting a CPO?

There are a variety of requirements that CPO operator must adhere to, according to the CFTC and the NFA.  Any party interested in starting a CPO in the United States must first register with the CFTC (Commodity Futures Trading Commission).  In doing so, select principals involved in the CPO must undergo a background check, and all parties involved in the selling or marketing of CPO securities must pass the “Series 3" licensing exam.  

For each registered pool, the pool operator must prepare and distribute a disclosure document, as well as prepare and distribute periodic account statements and audited annual financial reports.  Operators must also keep records concerning the participants, all transactions and operations of each pool, and maintain records of transactions carried out by the CPO and its principals

In addition, the CPO operator must apply for membership and file a disclosure document with the NFA (National Futures Association).  This file must be updated every nine months, provided that the pool is still actively pursuing participants; also, it must be updated whenever material changes are made to the pool.

What are the Commodity Futures Trading Commission and the National Futures Association?

The CFTC was created by Congress in 1974 to regulate the commodities futures and options markets in the US.  This independent agency encourages an efficient, competitive marketplace by offering participants protection against fraud and other abusive trading practices.  In doing so, it maintains its greater mission of upholding the integrity of the markets and providing a proper means for assimilating prices and limiting pricing risk.

The NFA is an independent, self-regulatory organization which oversees the US futures industry.  It works to uphold the integrity of the US futures markets through a series of programs, rules, and services.  The NFA serves as an industry "watchdog," regulating every person or firm that conducts futures trading with public customers, and employs arbitration and mediation techniques to settle disputes.  Its Board of Directors is composed of industry participants nominated by their peers, and it is entirely funded through membership dues and fees paid by users.

What types of securities does a CPO invest in?

CPO’s invest in a wide variety of futures and options positions, depending upon the goals and objectives of the pool.  Operators trade in everything from metals (gold, silver, copper), soft commodities (sugar, coffee), oil and grains (corn, wheat) to currencies (Euro, Thai Baht) and equities indexes (S&P futures).  

With CPO’s, does the size of the fund matter?

CPO’s can vary considerably in size.  One of the largest commodity pool operators, United States Commodity Funds LLC, manages several of the largest exchange-traded commodity funds, including the United States Oil Fund, LP and the United States Natural Gas Fund, LP.  These funds manage billions of dollars in investor capital.  Conversely, funds can also be set up to limit size or scale of participants.  When judging a fund, rating it by its size is less-important than weighing factors such as strategy, level of risk, and the manager’s past performance.   

What types of businesses are necessary to aid a CPO in its launch?

Typically, several outside businesses will help a CPO manager throughout the startup process.  A legal team can offer valuable insight into ensuring that the CPO drafts the proper documentation and is properly registered with the correct regulatory authorities.  A prime broker is necessary to provide clearing and financing facilities.  Meanwhile, an auditor ideally handles all fund tax work, provides K-1's to investors, and handles a full audit for the fund.  Additionally, marketing professionals help a manager to raise investor capital, while web developers will aid in launching a fund website.    

How do CPO funds raise capital?

There are a variety of means from which a CPO fund can raise capital.  Most startup funds initially raise capital through the founding partners and their friends, families, and colleagues.  Third party marketers specializing in capital introduction can also help growing funds reach out to potential investors.  Many CPO’s also raise funds from pension funds and institutional clients; however this usually does not occur until after a manager has established a credible track record.

What is a Disclosure Document?

The Disclosure Document is a document which provides each new potential investor with information about the pool manager, principals, and all other parties influencing the trading activities within the pool.  The document must be approved by the NFA prior to any solicitation of new investors.  The Disclosure Document also must provide the trading/performance histories of all parties sharing influence over the distribution of the pool’s funds, as well as outline the various risks inherent in the pool.  Additionally, it should provide information about fee cost structures, manager compensation, investment minimums, and capital withdrawal provisions.  Finally, new pools should provide details about the length of the initial fund-raising process, as well as the fund’s expected launch date.

What are the advantages to investing in a commodity pool over a managed account?

While a commodity pool represents a pooling of investor funds (similar to a mutual fund), a CTA, or Commodities Trading Advisor, normally manages separate accounts for each of his investors.  While each offers the investor exposure to managed futures and/or commodities, a CPO has a few advantages.  For one, the investor will never receive margin calls, something which is a distinct possibility in a highly leveraged separately managed account.  CPO's have this distinct advantage by virtue of being set up as LP's (Limited Partnerships).  Hence, the maximum that an investor can lose in a CPO is equal to her portion of the pool.  Also, because of the CPO's size advantage over a single managed account, each investors' purchasing power is magnified greatly.  In addition, the opportunities for diversification become much more significant as the size the pool grows.  Finally, if a CPO has a single operator or advisor overseeing the pool, investors should benefit over those who share separate accounts with a single CTA.  This is because by pooling their funds, CPO investors receive more timely and direct service from the manager (compare this to a CTA, who oftentimes juggles the trading of several separately managed accounts at one time).

Are all CPO operators required to register with regulators?

Operators of small pools are not required to register with regulators.  These pools must not exceed a maximum of 15 investors, and tradeable capital cannot be in excess of $400,000.  Unregistered operators must notify the NFA, CFTC, and investors of their status.  Pools whose operators receive no compensation also fall into this category.

How is a CPO registered as a business entity?

Most CPO's are organized as LP's (Limited Partnerships), with the general partner assuming the role of CPO.  However, an organization or company can also register as a CPO. One advantage of forming an LP is that, in the event of loss, the extent of liability for each partner is only proportionate to their investment stake, or principal investment in the partnership.

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