One definition of a speculator is someone who wants to profit from the price discrepancy between hedgers. Speculators fall into two categories: large speculators and small speculators.
There are many famous speculators, like George Soros and Jim Rogers, as well as infamous, like the team that collapsed Long-Term Capital Management. Nicolas Leeson, the guy who broke Barings Bank and Amaranth, lost $9 billion trading natural gas futures.
For speculators, it’s not all just sad stories. The same Fortune 500 companies, banks, and dealers that make markets for forex also trade in the futures markets for their own accounts or on behalf of their clients. They successfully meet their objectives year in and year out. Goldman Sachs is one of the more famous investment banking firms that trade futures and forex. They have had record profitable years with their Goldman Sachs Commodity Index.
The CFTC decides who is a large speculator. The CFTC is a branch of the U.S. government. They regulate futures and make sure that no market manipulation is going on. In order to successfully do this, they have guidelines that all traders must follow.
In their eyes, the only difference between a large speculator and a small speculator is the reporting requirements. The CFTC has set different reporting thresholds for different markets. Some markets require that you file a report with them when you hold 100 contracts at one time. Other markets require that you file a report if you hold as few as 25 contracts.
Anyone who doesn’t have to report is deemed a small speculator. That’s where the average retail client fits in. The accuracy of this assessment can be deceiving. There are futures and forex money managers called Commodity Trading Advisers (CTAs) that work with clients and operate just like the large speculators but may not have the reporting requirements because they trade so few contracts.
CTAs are considered the “mutual funds” of the futures and forex industry. CTAs actively work with private investor money and use various strategies to attempt to minimize the speculative risks associated with futures and forex.
Managed futures are the perfect investment for those retail investors who cannot take the time out of their day to follow the markets. It is also appropriate for investors with large portfolios who are seeking diversification. These are true hedge funds. Since futures and forex are not correlated to stocks, any movement in the stock market, up or down, has no true bearing on what happens in these markets. Investors put a small portion of their overall portfolio with a CTA in order to increase their overall rates of return.
Sometimes you can invest indirectly in a managed futures or forex account by participating in a commodity pool. Many commodity pools have small minimums. There is no true uniformity on how commodity pools or managed futures accounts are run. It is best to have a prospectus sent to you and have your futures broker or other professional go over the details with you.
Even though CTAs may not be actively reporting, small speculators have to be aware of their strategies and successes for two reasons. First, by understanding how they operate, you can gain insight into becoming a better trader. Second, since many of their strategies are based in technical analysis, you don’t want to get steamrolled by their activity. Whatever the case may be, you have to watch out for them.