The Small Futures Account Conundrum By Dean Hoffman www.hoffmantrading.

com
I recently scanned a Commodity Trading Advisor Data base to look at minimum account sizes and found minimum account sizes ranging from $25,000 to $5,000,000. I found the typical CTA trading a small minimum account size had a concentrated portfolio, high margin requirements, little money under management, a short track record, high volatility or was trading just options. Diversified trend followers seemed to have minimums that were usually at least $1 Million. Small accounts in the futures markets (less than $250,000) face a considerable number of challenges not experienced by large accounts. Considering that most commodity futures contracts have face values in the tens or hundreds of thousands of dollars its easy to surmise that these contracts were designed for large accounts. However, low margin requirements have long attracted smaller speculators and have been the proverbial rope to hang one self with. Lets analyze why large accounts may have it easier than small accounts. First, large accounts can afford to trade virtually any opportunity at any time. There are over 100 tradable commodity markets worldwide, and should buy or sell opportunities simultaneously exist in any or all of them a large account can easily afford the margin and exposure to trade them all. It has been said that that when it comes to investing that diversification is the only free lunch and large accounts can afford to diversify with impunity. This is in stark contrast to the small account where prudence dictates only having risk and exposure in a limited number of markets simultaneously. Furthermore, a large account is not restricted from trading contracts whose volatility is relatively high. For example, a London copper trade with a stop loss $14,000 away represents risk of 1.4% in a million dollar account. However, in a $100,000 account this same trade would represent risk of a whopping 14%! Of course any sensible trader would avoid that trade in such a small account; however, having to skip these opportunities is yet another penalty paid by the small account. Whats more, the large account can utilize one of the easiest forms of risk control available, contract scaling. For example, lets assume a large account is long 50 gold contracts during a large bull market run and wishes to reduce his open trade profit exposure. He can simply scale off however many contracts he needs in order to lock in profit, while simultaneously maintaining his profitable position. However, what can the small account do in terms of scaling out if he only has on one contract in the first place!? Once again, the small account does not enjoy the flexibility to control risk in the same fashion as the large account. Now, for all of the negativity Ive just outlined above I actually believe the smaller account can have a significant advantage over large ones. Small accounts are able to efficiently trade markets that would be far too illiquid for large accounts. Most

institutional size funds are virtually confined to only trading financial and energy instruments and miss out on trading opportunities in the more traditional physical commodity markets. Specifically commodities like Grains, Foods, and Fibers etc. This creates a lack of diversification and an over reliance on those limited sectors. The ironic thing is that many small accounts end up with the same problem because they have chosen to deal with their small account problem by only trading a few (or one) market! They end up missing out on the sharpest edge they have on the big boys. Fortunately, it is for those smaller traders who want the advantages of true global diversification that Hoffman Asset Management Inc. was formed. HAMI is carving out a unique niche by offering a trading program that monitors and trades over 70 diversified commodity markets, yet is designed to trade accounts as small as $125,000. Furthermore, the program has been designed to attempt to keep draw downs and volatility in line with what might be available in a very large widely diversified account*. This combination of trading a large number of markets within a small account while keeping volatility in check is truly unique and fills what we feel is a tremendous void in traditional managed account offerings. Obviously the exact nature of what we do is proprietary; however the basic premise is based on the concept of relativity. HAMI monitors a very large universe of tradable commodities for opportunities, yet, is highly selective in those trades that it will take. For approximately every 5 trading opportunities identified by HAMIs combination of over 10 trading systems, only 1 will be taken. Our algorithms are not only considering the markets direction and movement potential but just as importantly, how that potential ranks on a risk adjusted basis. The idea is that an opportunity can only be evaluated relative to what else is available. For example, how would you know if earning 5% was good or bad? The answer should be it depends on what else is available. In other words, the 5% return is only good or bad relative to other options. What HAMI Incs. strategy attempts to do is identify a limited percentile of all the markets it tracks as being the best candidates. Then, only those markets will be considered should one of our many systems generate a signal. The portfolio selection process is dynamic and rebalanced every day. This means that from day to day the basket of markets that we will consider trading changes. We feel this keeps our trades limited to only those markets with the best risk adjusted potential. This allows us to evaluate a very large portfolio while still keeping the number of trades and margin requirements very low. Monitoring a very large portfolio is critically important because if you initially limit yourself to a predetermined small portfolio, how do you know that those markets will be the best markets in the future? (Hindsight bias portfolio selection is a form of curve fitting and is a major downfall of many traders). If an exceptional opportunity develops in a market outside of your predetermined portfolio wouldnt you want to take advantage of it? By trading with our strategies you dont arbitrarily rule out any market that may perform well in the future and you have eliminated the tendency to pick a portfolio based merely on past performance (curve fit) considerations. The key is researched logic that

can do this automatically and thats what Hoffman Asset Management Inc. trading strategy utilizes. *Hoffman Asset Management Inc. attempts to limit risk but no guarantees to limit losses to a certain percentage can be made.
RISK DISCLOSURE STATEMENT AND DISCLAIMER

PAST RESULTS ARE NOT NECESSARILY INDICATIVE OF FUTURE RESULTS. THE RISK OF LOSS IN TRADING COMMODITIES CAN BE SUBSTANTIAL. YOU SHOULD THEREFORE CAREFULLY CONSIDER WHETHER SUCH TRADING IS SUITABLE FOR YOU IN LIGHT OF YOUR FINANCIAL CONDITION. THE HIGH DEGREE OF LEVERAGE THAT IS OFTEN OBTAINABLE IN COMMODITY TRADING CAN WORK AGAINST YOU AS WELL AS FOR YOU. THE USE OF LEVERAGE CAN LEAD TO LARGE LOSSES AS WELL AS GAINS. IN SOME CASES, MANAGED COMMODITY ACCOUNTS ARE SUBJECT TO SUBSTANTIAL CHARGES FOR MANAGEMENT AND ADVISORY FEES. IT MAY BE NECESSARY FOR THOSE ACCOUNTS THAT ARE SUBJECT TO THESE CHARGES TO MAKE SUBSTANTIAL TRADING PROFITS TO AVOID DEPLETION OR EXHAUSTION OF THEIR ASSETS. THE DISCLOSURE DOCUMENT CONTAINS A COMPLETE DESCRIPTION OF THE PRINCIPAL RISK FACTORS AND EACH FEE TO BE CHARGED TO YOUR ACCOUNT BY THE COMMODITY TRADING ADVISOR (``CTA''). THE REGULATIONS OF THE COMMODITY FUTURES TRADING COMMISSION (``CFTC'') REQUIRE THAT PROSPECTIVE CLIENTS OF A CTA RECEIVE A DISCLOSURE DOCUMENT WHEN THEY ARE SOLICITED BY THE CTA TO ENTER INTO AN AGREEMENT WHEREBY THE CTA WILL DIRECT OR GUIDE THE CLIENT'S COMMODITY INTEREST TRADING AND THAT CERTAIN RISK FACTORS BE HIGHLIGHTED. DISCLOSURE DOCUMENTS FOR SOME CTAs ARE READILY ACCESSIBLE AT THIS SITE. YOU WILL NOT INCUR ANY CHARGES BY ACCESSING THESE DISCLOSURE DOCUMENTS. YOU MAY ALSO REQUEST DELIVERY OF A HARD COPY OF THE DISCLOSURE DOCUMENT, WHICH THE CTA WILL PROVIDE TO YOU AT NO COST. THIS BRIEF STATEMENT CANNOT DISCLOSE ALL OF THE RISKS AND OTHER SIGNIFICANT ASPECTS OF THE COMMODITY MARKETS. THEREFORE, YOU SHOULD REVIEW THE CTA'S DISCLOSURE DOCUMENT AND STUDY IT CAREFULLY TO DETERMINE WHETHER SUCH TRADING IS APPROPRIATE FOR YOU IN LIGHT OF YOUR FINANCIAL CONDITION. THE CFTC HAS NOT PASSED UPON THE MERITS OF PARTICIPATING IN THE TRADING PROGRAMS DESCRIBED ON THIS WEBSITE NOR ON THE ADEQUACY OR ACCURACY OF THE CTA'S DISCLOSURE DOCUMENT. OTHER DISCLOSURE STATEMENTS ARE REQUIRED TO BE PROVIDED YOU BEFORE A COMMODITY ACCOUNT MAY BE OPENED FOR YOU. THE INFORMATION CONTAINED HERE HAS BEEN PREPARED FROM SOURCES DEEMED RELIABLE, BUT WE DO NOT GUARANTEE THE ADEQUACY, ACCURACY OR

COMPLETENESS OF ANY INFORMATION. NEITHER HAMI NOR ANY OF ITS RESPECTIVE AFFILIATES, OFFICERS, DIRECTORS, AGENTS AND EMPLOYEES MAKE ANY WARRANTY, EXPRESS OR IMPLIED, OF ANY KIND WHATSOEVER, AND NONE OF THESE PARTIES SHALL BE LIABLE FOR ANY LOSSES, DAMAGES, OR COSTS, RELATING TO THE ADEQUACY, ACCURACY OR COMPLETENESS OF ANY INFORMATION ON THIS REPORT.