Jumping into a commodity pool is
one of several ways you can trade in commodity futures markets.
A commodity pool
is a shared private pool of money from multiple participants to speculate in
futures, swaps, or options markets. The commodity pool operator (CPO) manages
and solicits funds for the pool.
Most CPOs must be registered
members of the National Futures Association (NFA) to conduct business. You can
check the registration status and backgrounds of CPOs using the NFA’s Background Affiliation Status Information Center (BASIC) database available on
Trading futures through a pool
rather than through an individual trading account has its benefits. Your
purchasing power increases significantly when you team up with a pool. You gain
more leverage and diversification if you trade a $1 million account as opposed
to a $10,000 account, for example. The pool’s participants share in the profits
based on how much money they contribute. They also share in the losses.
Commodity pools are generally structured
as limited partnerships. That is, as a limited partner with a stake in the
pool, the most you might lose is the principal you deposited in the first
place. As a limited partner, you are generally
not responsible for margin calls. If the pool has a margin call, though, its
investors might as well. Everything depends on the terms in the contract
between pool participants and the pool. By comparison, if you trade futures on
your own, you could lose all your principal and would still have to maintain
the minimum margin amount to keep your position open. Before you become a pool
participant, find out in writing whether you will be responsible for any fees,
margin calls, or any other charges in excess of your deposit.
A commodity pool incurs the same
risk as individual traders in other ways, though. The pool still trades in
futures contracts and can be highly leveraged in markets that are very
volatile. And like an individual trader, the pool can suffer substantial losses
in a short period of time.
That’s why it’s important to
consider who is managing the pool, their backgrounds, and performance records—the
longer the track record the better. Thoroughly scrutinize your CPOs. In
addition to everyday trading risks, unregistered CPOs and commodity pools are
often fraudulent. Commodity pool fraud and misconduct generally occur in
Misappropriation of Funds
Fraudulent CPOs could
misappropriate funds instead of trading collected funds in commodities or futures
as promised. The money can wind up in the con man’s personal account or be used
to lead a lavish lifestyle. In other cases, the CPO could take bigger risks or
trade the money in ways that aren’t disclosed.
Commodity pools have also been
used in Ponzi schemes. A Ponzi scheme is where a con man accepts funds from
some people, and uses all or part of those funds to pay off others who had
previously deposited their funds with him. In this way the con man maintains
the appearance of a legitimate successful trader, but it is really just a shell
game. Some red flags for this type of scheme are where the CPO delays returning
your funds upon request or blames others for restricting his ability to return
A CPO might make false promises
of security or claims of high returns. A CPO may claim falsely that he has
qualifications or a winning track record. He could even falsely claim that one
can profit from publicly known information—making his strategy a “sure thing.”
Remember: Commodity futures and derivatives trading are inherently volatile and
risky. You should always be aware that you could lose your entire investment.
Further, for every trade there is one winner and one loser, and even the
so-called winner of a trade may not make any money if the fees and commissions
charged for the trade exceed the amount generated by the trade.
Lack of Registration
Most CPOs must be NFA registered.
Such CPOs are subjected to the associated regulations. Other CPOs are not
required to be registered. These include the following types of CPOs: Operators
of small pools (less than 15 investors and $400,000 in assets); operators of
single commodity pools who do not advertise or receive compensation; and operators
of pools that only trade a minimal amount of futures, where participation is
limited to “accredited investors” or qualified eligible persons and satisfies certain
The CFTC recently won a verdict
for a case that spanned several years and covered three of the fraud attributes
discussed above. Grace Reisinger of Grand Island, Nebraska, was operating a
fraudulent commodity pool scheme. The CFTC charged Reisinger and her company,
ROF Consulting, LLC, for misappropriating funds, making fraudulent
misrepresentations, and omitting material information to actual and prospective
pool participants—including that she was exempt from the CFTC’s registration
requirement and that the pool only solicited and accepted funds from
participants who met the definition of a “qualified eligible person”—and
failing to register.
You Are Entitled to Information
CPOs are required to give you
information up front and in monthly statements. In most instances, CPOs cannot
accept your money until they provide you with disclosure documents that contain
information about the essential players in the pool:
- Any outside advisors who provide
trading advice or make trading decisions
The documentation must also
disclose previous performance records, if there are any, and a clear
delineation of the risks involved.
With a new pool, there is
frequently a provision that the pool will not begin trading until a certain
amount of money is raised by a specified deadline. Defining this deadline is
required. If there is no deadline—building up to the fund minimum can go on
indefinitely—that should also be indicated.
Carefully analyze disclosure
documents and be clear on the terms. Know how your money will be traded. If
you’re waiting for the pool minimum to be met, find out where your money will
be held and what interest you might earn, if any. If the pool never begins,
know when and how your money will be returned.
Your disclosure documents should
indicate whether or not you are responsible for any losses in excess of your
investment in the pool. Fees, initial charges, and administrative costs should
be noted in the disclosures.
Remember, if you are considering participating
in commodity pools, the following information should be made available to you,
and you should request it:
- Disclosures that contain pool
operator information, past performance records, and past performance of the
pool's principals or any other individual who will provide trading advice or
making trading decisions.
- A mandatory disclosure that
documents the risks involved.
- A mandatory deadline disclosure
indicating the time period for raising funds.
- Explanation of how your money
will be traded in the meantime, what interest you will earn (if any), and how
and when your investment will be returned in the event the pool does not start
- Disclosures that outline the
procedure for redeeming your shares in the pool, any restrictions that may
exist, and provisions for liquidating and dissolving the pool if more than a
certain percentage of the capital were to be lost.
It is better to be over informed
than foggy on the details. If you have questions, are aware of suspicious
activities, or believe you have been defrauded, please let the CFTC know
quickly. Call the CFTC or visit the File a Tip or Complaint page.