Last week I visited the offices of Steben, one of our managed futures managers, located in Gaithersberg, VA. I really felt my time well spent, as I learned a lot about their philosophy, culture, and people.
A number of entities regulate Steben, making them more regulated than almost any investment company. One of the reasons they are so regulated is because they trade commodity futures, in addition to financial futures. The agencies auditing them are FINRA, NFA, CFTC, SEC, and the securities departments of all 50 states. Additionally, they are also annually audited by McGladry.
Steben invests their funds with a number of Commodity Trading Advisors, or CTA’s. A CTA is an individual or a firm, registered with the Commodity Futures Trading Commission, that receives compensation for giving people advice on options, futures and the actual trading of managed futures.
Steben doesn’t invest in funds managed by the CTA’s, so they are not a fund of funds. If Steben invested in other limited partnerships, it would be difficult for them to monitor the trades of all their CTA’s. Instead they hire the various CTA’s to manage separate accounts. This allows an incredible amount of transparency as they can see every trade done in all their accounts as they happen.
This is very similar to the arrangement you have with KFG. TD Ameritrade holds your funds and you give KFG a limited power to trade on the account. This is the exact relationship Steben has with their individual managed futures managers.
Nothing their managers do is subjective. All trading decisions are done technically, which means they are computerized, systematic, and mechanical in their trading. This is important in managed futures, as emotion is part of the irrationality that drive markets. Trends are established by emotions, so a manager doesn’t want to be part of setting the trend, which is very important in trend following.
Steben’s researchers emphasized their fund is non-correlated to the markets, rather than negatively correlated. Non-correlated means it may be up when general markets are up or it may be down. Negatively correlated means it will always run opposite of the equity markets.
Investing in Steben is not possible for every investor as their funds have differing investor requirements, offering procedures and related restrictions.