By Doc Leonard and Frank Pusateri

Frank Pusateri and I met in the late 70′s after he joined EF Hutton & Co.(EFH), where he was in charge of performance analysis of managed commodity accounts, both internally (in-house) and externally (out-house).  At the time, EF Hutton was the leader in the industry for raising money for this relatively new product area and I was representing several or more out-house advisors trading through EFH.   It was like the old west at EFH when Frank arrived.  There was no formal process for approval for out-house advisors in commodities and there were multiple trading desks scattered across the country in different offices, entering trades for the out-house advisors trading at the firm.   His job was to formalize a department in New York and get a fix on the selection and firing of external managers participating at EFH.  Not an easy task.

Frank was schooled at Colgate and Dartmouth (MBA) and Exxon Chemical Company, where he was afforded a broad analytical background in the interpretation and preparation of financial data using both manual and computer based techniques. (I always thought he was hired by EFH because he could spell ‘oil’.)  At EFH he began the process of learning and quantifying a new industry.  He personally visited every major CTA on Hutton’s books.   In this time period he produced the first documented list of questions to be asked of CTAs in an effort to see if an apple was an apple and not a banana.  Through the years his original list of questions has been copied and recopied and mostly increased in size and numbers of questions and pages.

Over the years, Frank and his companies have been involved in almost every facet of the managed account business from back office, to being a CTA, to funds, to specially designed portfolios for high net worth investors, to advising various brokerage houses and to helping emerging CTAs.

A year ago we took a swing at cleaning up and reducing one of the latest most employed documents, which still has some questions (word for word) from the original document Frank wrote decades ago.   Frank finally decided to write a new and shorter questionnaire from the viewpoint of what the investor should know when making a determination to invest with a CTA.   We encourage all CTAs to answer the questions for their own benefit and for the benefit of potential investors.  We have found many of the issues raised in these questions are not usually considered by either the trader or investor before they start trading

 

SIMPLIFIED DUE DILIGENCE QUESTIONNAIRE

COMPANY: _______________________________________

TRADER/PRINCIPAL: _______________________________

TELEPHONE: _____________________________________

EMAIL: ___________________________________________

DATE: ______­­­­­___­­­__________________________________

 

BACKGROUND:

1)      How many years have you traded and what markets have you traded:

  • For your personal account?
  • For client accounts?

2)      Do you have previous industry firms, systems and track records not required to be disclosed in your current disclosure or fund document?

3)      Do you use any outside sources of information and data to make your trading decisions?

 

PORTFOLIO:

4)      What do you estimate is the maximum equity you can trade?

5)      Do you offer multiple account sizes?  If yes, what account size do you believe gives the best performance?

6)      How did you select the markets you trade?

7)      What are your estimated average initial and maximum margin requirements?

8)      How do you enter a new account into the market, for example take all existing trades or take only new trades?

9)      Do you increase the positions you trade for an account based on profits?  If yes, how?

10)  Do you ever add to existing positions?

11)  What do you estimate is your average holding period for a trade?

12)    Do you use the same parameters for very market you trade?  If not, how were each market’s parameters selected?

 

RISK MANAGEMENT:

13)  What do you estimate is your average and maximum risk on any new trade, as a percent of account size?

14)  How do you exit a trade?

15)  As trades become profitable is your exit point stay fixed amount, or a fixed percentage or does it expand or contract?

16)  What do you estimate is the maximum risk on your total portfolio?

17)  What was your worst peak to valley drawdown, using daily information, in the past?

 

RESEARCH:

18)  Are you engaged in continual efforts to improve your trading approach?

19)  Have you made any changes in your trading approach over the time period of your track record in your disclosure or fund document?

20)  Have you made any changes in the markets you trade over the time period of your track record in your disclosure or fund document?

 

ADDITIONAL NOTES YOU BELIEVE ARE IMPORTANT:

____________________________________________________________________________________________________________

 

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