The article is presented in two sections. Traditional and Alternative Profiles are offered. Reformat content to use with any investment or financial service that you might consider.
Traditional Due Diligence
The traditional due diligence used here is directed to trading advisors. For research companies, trading managers, hedge funds and other industry services, variations of the same theme could be implemented. Obviously, the information is completed by the service provider.
Although slightly altered for each situation, the foundation follows:
Section One Trade Evaluation
Approximate # of Trades Per Month for each $____________ unit:_________
Size of Fully Funded Account:
Notional Funding Accepted:
What funding level are the statistics below at:
% of Equity Committed to Margin:
Percentage of Profitable Trades:
Average Profit $ Average Loss:
Largest Profit $ Largest Loss $
Worst Monthly Loss% Worst Draw down%
Number of Months in Worst Draw down:
Section Two - Strategy Evaluation
- What are annual financial objectives of this strategy?
- How many trades can I expect monthly and how are trades executed (stops, market orders, MIT’s etc) and allocated to client accounts?
- What are your financial and risk/ return requirements for each trade? For example: Trade selection as a % of total account size. Capital risk / potential profit for each trade.
- How much capital do you want to manage?
- How much equity can your current strategy manage without affecting performance?
- How are clients notified if strategies are changed?
- What is the maximum draw down a client should be prepared to live with for each account size you trade.
- How long should I commit my capital without making money before giving up on you?
- Under what market conditions do you not make money?
- How do you adjust your strategy to changing market conditions, particularly a major increase in volatility?
- What would prompt you to completely halt trading and stand aside?
- What is your overall philosophy regarding losing other people’s money?
- How are new accounts entered into already existing positions? New Positions?
- How does it exit from profitable and losing positions?
- How does your strategy protect unrealized profits?
- Does your strategy adjust to current market conditions or do you need current market conditions to adjust to what your strategy is?
- How are you prepared for catastrophic moves?
- What percent range is risked on each group of markets at any one time?
- How does account size affect capital management strategies & number of contracts for specific markets added or deducted?
- What is your written list of money management rules?
- What modifications do you make in your trading strategy/systems when in a draw down?
- What, if any risk /reward ratios are considered or built into your strategy?
- Explain your concept pro/con regarding diversification?
- How are options used with your strategy?
- If a systematic trader, how do you use discretion within your system?
- What was the average fee structure that your track record was calculated at?
- What formula was used to calculate the $1000 NAV?
- Has your track record been recalculated because of NFA intervention? If so what was required of you?
- Is your 13 column track record calculated by an accounting firm or in house?
- What mathematical distortions do you perceive exist between the method of track record calculation required by the CFTC and the truth of what an investor can expect? How would you suggest rectifying the distortion so the investor has more comfort with your program?
- What questions would you add to this list if you were sponsoring this service to clients?
- What other distortions exist in the composite track that we can't see or might be construed as misleading a potential client?
Section Three - Business Risk Management
- Why would anyone entrust you with money?
- Understanding that what can go wrong may be perceived as negative, in managed futures, its intelligence! Have you considered what can go wrong, how it can happen and prepared for the potential event? Briefly Describe.
- What is your weakest point when trading?
- How do you manage stress daily?
- What other means of support do you have ?
- Do you trade your own account and how is it traded differently than client funds?
- Who manages all administration and client service within your company?
- How much do you believe administration takes away from your time needed with markets?
- Do you have any programs that were closed? If yes please add length of program before it closed. How much capital was managed? Why did it close?
- Do you compensate third parties for marketing your services. If YES, is anyone compensated in relation to my account?
- How are you prepared for electronic emergency?
Alternative Due Diligence
Quantum Questions by Ken Wilbur contains writings by the world's greatest physicists. Included are Einstein, Heisenberg, Schroeder, Jeans and Eddington. One sentence written by Jean is:
"The physical realm of life is merely the materialization of thought."
Thought is energy. Behind every thought is an intention. Within that intention is energy. It is the quality of energy within the intention we perceive as possible cause for unnecessary loss.
Whether the intention is within me, you, an advisor or anyone else, intention is always the cause for success or failure. This includes intention behind any dynamic of any relationship.
When structuring a due diligence, we ask questions that bring the quality of energy and intention to the surface. When any perceived conflict is resolved, the materialization of that intention can only cause a healthy reality. By simply removing the conflict, Eternal Value easily flows. Read the Article for Investment Professionals #4 Managed Futures Eternal Value Risk and Return.
Advisor Analysis
Apply intention analysis to the trading advisor. An advisor can use a diversified strategy, however if energy underlying the intention is fear, diversification is being used to compensate for unresolved weakness.
Anything used to compensate for essential weakness, without resolving the fundamental cause of an elemental weakness, has potential to weaken the entire structure.
Turn the Energy Around
An advisor has proven to be successful in one market, under variable market conditions. The advisor's strategy has also proven an adaptability to current market conditions. This advisor researches other markets where the work can be applied.
Diversification is also being applied. However energy underlying the intention and supporting the diversification is strength. Rather than reacting to fear of loss, the advisor is coming from elemental strength using diversification to fundamentally increase potential profitability.
Both instances offer 'DIVERSIFICATION' One will weaken a strategy and the other strengthen it. In future articles we apply this paradigm to Modern Portfolio Theory.
Prove it to Yourself
Analyze the individual trades of several advisors. Look at:
- Number of markets traded.
- Market conditions of successful trades.
- Number of trades.
- Profit and loss ratio of completed trades within each market.
- Percent of equity committed to margin.
- Percent of equity risked on each trade expressed either as a percentage of margin or as total account size.
- Average profit and loss, percent of profitable trades.
- Long or short bias to each market.
Other Alternative Thoughts
- Health considerations - I cost myself over $500,000 in bad decisions because of a misdiagnosed under-active thyroid and herniated disc. Did you know that a traditional MD will give you pain medication because of hip-pain (treats a symptom), yet has no idea that your back may be connected to your hip (seeking cause)? Did you know that a thyroid effects your mental acumen, and a traditional MD may tell you its' in your head?
A good alternative practitioner will usually trust your body signals and seek cause by integrating your input with their practical knowledge. They acknowledge your natural ability as healer with themselves only as a catalyst. Financial Management should follow a similar protocol.
- Self Responsibility - Does an advisor blame a computer, strategy or the markets when wrong? Listen carefully when speaking with people, you'll always hear truth of who they really are.
- Quality of People - Some people, no matter how wealthy in cash are poverty stricken in love, spirit and most important truth. They take your energy, joy and steal happiness from your life. Consider sending them elsewhere. Cause and effect proves you can double the perceived loss with less effort and more fun!
To repeat science has proven that by eliminating cause of loss - Universal Law at its highest expression of Eternal Value will naturally flow.
FACT: If our intentions and actions are pure good must follow.