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Wheres Does the Money Sit When Commodity Trading?

InvestorEducation / Learn to Trade Nov 10, 2009 - 06:03 AM GMT

By: Andrew_Abraham

InvestorEducation

Too many investors forget to ask this very important question when trading commodities. In many cases commodity traders leave money in segregated accounts at their Futures commission merchant. As well there are cash management companies. In order to survive in these trying times …using the words of Andy Grove… ” The Paranoid Survive”. I am paranoid…in my trading with my partners in our commodity pool…as well as I am paranoid when I allocate to other commodity trading advisors. As Nissim Taleb has brought out in his book…Fooled by randomness anything can happen and for that fact I prepare for it.


For those commodity traders that have been around remember Refco the Futures commission merchant. Quoting Wikipedia..Refco was a New York-based financial services company, primarily known as a broker of commodities and futures contracts. It was founded in 1969 as “Ray E. Friedman and Co.” Prior to its collapse in October, 2005, the firm had over $4 billion in approximately 200,000 customer accounts, and it was the largest broker on the Chicago Mercantile Exchange. The firm’s balance sheet at the time of the collapse showed about $75 billion in assets and a roughly equal amount in liabilities. Though these filings have since been disowned by the company, they are probably roughly accurate in showing the firm’s level of leverage. More so…Refco, Inc. entered crisis on Monday, October 10, 2005 when it announced that its chief executive officer and chairman, Phillip R. Bennett had hidden $430 million in bad debts from the company’s auditors and investors, and had agreed to take a leave of absence….And even more so..On March 15, 2006, information leaked by the U.S. prosecutor’s office revealed that Refco held offshore accounts holding as much as $525 million in fake bonds.

Now imagine you had been trading with Refco even with segregated accounts? Not a fun experience…If I remember correctly, that even Jim Rogers had money with them. The story can be continued even with Lehman brothers… These highlight just leaving money at your FCM or broker…

Then there are other nightmares with cash management companies..

Sentinel the cash management company filed for bankruptcy Aug. 17 2007 after four days after halting withdrawals from clients. Sentinel whose clients included clients futures brokers, as well as high net worth investors and commodity trading advisors.. blamed the worldwide credit crunch for its problems, although the Securities and Exchange Commission has accused the cash-management firm of fraud and misappropriation of clients’ assets. Sentinel was another scam that destroyed many commodity trading advisors careers. As it is very important to try to maximize your returns…as well as returns via interest…but at what price?

What sets us apart from other Commodity trading advisors and commodity pools is that we are not only concerned about the return on investment but how much risk you will have to tolerate to achieve your goals. Commodity traders at Refco got hit by fraud and thought they were secure because they were in segregated accounts… This was not exactly correct. Commodity traders that invested with Sentinel wanted to maximize their interest returns… which ended costing them their business.

After being in the field for all these years… One suggestion… be Paranoid…What we do is keep our money that is not required for margin at the Fed with Treasury Direct. I would believe this is the safest place for cash. The US govt can always print more money. Keeping your cash that you do not need for margin is one of the steps of prudence that should be over looked. If you are trading commodities yourself…open a treasury direct account. If you are allocating to a commodity trading advisor…ask where the cash is sitting. You can feel most comfortable if it is sitting at the US Treasury.

Andrew Abraham
www.myinvestorsplace.com

Andrew Abraham has been in the financial arena since 1990. He is a commodity trading ddvisor and co manager of a Commodity Pool. Since 1993 Andrew has been a proponent of quantitative mechanical trading programs. Andrew's major concern is not only total return on investment but rather the amount of risk that one would have to tolerate in order to achieve returns He focuses on developing quant models that encompass strict risk adherence and correlation. He has been a speaker at conferences as well as an author of numerous articles. Andrew has spent years researching ideas that have the potential to outperform indices as well as maintain fewer draw downs.

Visit Angus Jackson Partners (http://www.angusjacksonpartners.com) Contact: A.Abraham@AngusJackson.com (mailto:A.Abraham@AngusJackson.com)

© 2009 Copyright Andrew Abraham - All Rights Reserved
Disclaimer: The above is a matter of opinion provided for general information purposes only and is not intended as investment advice. Information and analysis above are derived from sources and utilising methods believed to be reliable, but we cannot accept responsibility for any losses you may incur as a result of this analysis. Individuals should consult with their personal financial advisors.


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