Investing in managed futures.

If you think commodity futures are the place to be, where should you put your money? Trading the account yourself takes time, discipline and knowledge. Another option is having someone else manage your dollars.

With the spectre of inflation haunting the economy, the odds of big trends in

Futures markets are attractive to traders for several reasons: The markets are relatively liquid, transaction costs (commissions and slippage) are low, it is as easy to go short as it is to go long, and futures allow the use of higher leverage to maximize returns.

Stock market investors, for example, can borrow up to half of the purchase price of a security. At this level, the investor is said to be 50% leveraged, and when you use leverage, the percentage return for a given price movement is accelerated. Return on an unleveraged trade when the stock moves 10% is 10% (not considering transaction costs). At 50% leverage, the same price move yields the investor 20%. Leverage is a double-edged sword, however; losses are amplified as well as profits, and a 10% move against the position would double the size of the loss to 20%.

I can manage fine, thanks

The traditional way to play the futures markets has been to open an account with a broker and let him trade. Brokers are compensated from trading commissions charged on a round-turn basis. You are paying for a two-way transaction -- getting into and out of a position.

Retail brokerage commissions used to average $70-$80 per round turn. With the explosive growth of discount brokers, competitive pressures have brought commissions much lower: $8-$35 per round turn. Discount brokers execute trades and don't generally offer trading advice, so a host of advisory services, quotation and data services and trading systems have emerged to provide traders with the information and ability to make their own trading decisions.

But trading an account yourself is risky. A significant proportion of traders lose money trading commodities. Fixed costs are high (quote screens, commissions, office equipment, etc.) and so is risk. You can end up owing more money than you had in the account in the first place.

Rather than opening an account with a broker and dabbling in soybeans, many individuals are letting professional managers trade futures for them. Managed futures offer several choices:

* Individual managed accounts;

* Private futures funds;

* Public futures funds.

Hiring an advisor to manage an individual trading account is similar to using a broker, but with a key difference: The commodity trading advisor (CTA) isn't usually compensated on commissions. Better CTAs make money when you do, using a combination of management and profit incentive fees. Management fees are charged as a percentage of the equity in the account and range between 3% and 6% annually. When your account grows, the CTA gets a slice of a bigger pie. Profit incentive fees are calculated as a percentage (usually between 15% and 30%) of new trading profits. If the advisor doesn't make money for you, he or she doesn't get paid any incentive fees.

Advisors organize client trading in two ways: individual client accounts or a single, pooled account from which all client money is traded. A CTA who does the latter is a commodity pool operator (CPO).

The pooled approach provides better diversification among markets. Where a small individual account may be able to trade one contract in just two or three markets because of the margin required, the same money in a pooled account can participate in positions in many markets, diluting the risk exposure.

Finding the right CTA to manage your money is not easy. Many with good, well-publicized track records are not taking new accounts or have raised minimum account size to levels beyond the reach of most individuals (see "Going after the big fish"). Newer CTAs may have lower minimum account sizes, but don't have long-term track records to back them up.

Several publications collect, analyze and publish CTA performance records to aid the selection process. Performance results often reflect the composite or average performance for all accounts under management by the advisor (see "Reading the bottom line," Futures, August 1992). Some client accounts likely have performed better than others. Before investing with a CTA, smaller investors should ensure the advisor is able to provide the same levels of performance for smaller accounts.

Also, check out the advisor's background with the National Futures Association (NFA) in Chicago. The industry's self-regulatory organization maintains a toll-free hotline to provide information on players in the futures industry. If a prospective advisor has incurred any disciplinary actions, the NFA will tell you. At the very least, you should verify the registration status of the CTA.

Managed account risks are the same as trading an account yourself: You can lose everything in the account plus money you never intended to trade. Most responsible advisors will halt trading in an account at a pre-specified loss level, (if possible) ranging between 40% to 50% of account equity; nonetheless, the possibility exists that the advisor might get into a lock-limit move against your position, and because the account is in your name, you will be held responsible for the losses.

Many investors prefer to leave the task of finding a trading advisor to professional CTA-pickers in the form of futures funds. These exist in two varieties: private placements and public funds. Futures funds have several advantages over single advisors:

* Losses are limited to the amount invested in the fund

* Funds may be comprised of many CTAs, so risk is diversified across different trading styles

* Costs may be reduced because of economies of scale

* Minimum account sizes usually are smaller than with individual advisors

* Individual Retirement Account (IRA) tax-free investment is possible at even smaller account sizes.

* Funds may also be the only way to "get a piece" of a rock-star trading advisor who has otherwise stopped taking new accounts.

Private placements can take forms such as limited partnerships, pools, securities, etc. They are organized by CPOs or trading managers whose value-added is an expertise in selecting traders and handling administrative, marketing and fund-raising duties.

Private funds are confined by regulations that make them less accessible than public funds. They are limited to less than 100 investors, of which 35 may be "non-accredited" (someone with a net worth of less than $1 million and a yearly income of less than $250,000). Regulations limit the ways private funds solicit clients, so hearing about them is difficult.

Public futures funds are treated as securities and regulated by the Securities and Exchange Commission in addition to the Commodity Futures Trading Commission. They are the easiest way for the small investor to participate in managed futures trading because minimum account sizes are relatively low (typically around $5,000) and can be purchased through a major brokerage firm.

There are two types of public funds: non-guaranteed and guaranteed. Non-guaranteed funds usually have a 50% loss limit. A guaranteed fund is designed so that all of the investor's original investment, if held with the fund for a set term (usually five years), is returned.