ASSET RAISING 102 - PART TWO - DUE DILIGENCE

What Happens In the First Meeting?

Once you’ve secured a meeting with a commodity trading advisor (CTA), the real work begins. The conversation itself is only the starting point. What follows is a deeper process of due diligence, a structured effort to understand how a trader thinks, operates, and ultimately fits into a broader portfolio of managers.

During my years consulting with investors, I met with hundreds of traders annually. Out of those, I would sit down with perhaps 50 to 60. And in the end, only a handful, sometimes as few as two, would be suitable additions to a client’s portfolio. The goal was never to find the “best” trader in isolation, but the one who added incremental value to a diversified group of managers.

I also learned to accept a humbling truth: I passed on traders who later became major successes. Due diligence is about making the best decision with the information available at the time, not predicting the future with perfect clarity.

What follows is a sample framework of the types of questions I used. These were never a rigid checklist. Some questions didn’t apply to certain traders; others opened the door to deeper, more revealing conversations. The purpose was always the same — to understand the trader’s history, strategy, risk philosophy, and potential role within a portfolio.

Key Areas of Due Diligence:

1. TRADING HISTORY

Understanding a trader’s background provides essential context for everything that follows. These questions help uncover motivations, experience, and evolution over time.

• When did you start trading?

• Why did you start trading futures?

• Do you trade your own money?

• When did you begin trading client equity?

• Has your trading approach changed since you started?

• Have you run other programs that you no longer trade?

• What were your worst trading experiences?

These questions reveal not just competence, but resilience, adaptability, and honesty — qualities that matter as much as performance.

2. TRADING STRATEGY

A trader’s methodology is the engine of their performance. Understanding how it was built, tested, and maintained is crucial.

• Did you backtest your strategy? Over what time frame?

• Does performance vary significantly with account size?

• Have you added or removed markets from your portfolio? Why?

• What was your worst peak‑to‑valley drawdown using daily data?

• Have you ever overridden your strategy?

• Do you use multiple systems or filters?

• Do you trade the same parameters across all markets?

• Do you update your strategy as new data becomes available?

• What is your average holding period?

These questions help determine whether the strategy is robust, scalable, and grounded in disciplined execution.

3. RISK AND PORTFOLIO MANAGEMENT

• Even the best strategy can fail without sound risk controls. This section explores how a trader protects capital and manages exposure.

• How did you select the markets you trade?

• Is your trading concentrated in one sector?

• Are position sizes fixed or variable?

• Do you use stops?

• Do you scale into or out of positions?

• Do you have a set risk level per trade?

• Do you manage total exposure within sectors?

Risk management is often where the most meaningful differences between traders emerge.

4. OTHER ESSENTIAL QUESTIONS

These final questions cut to the heart of the asset‑raising process: value proposition and differentiation.

• Why should an investor hire you?

• How do you add value to a portfolio of traders?

A trader who cannot articulate their edge — or their role within a diversified portfolio — is rarely a strong fit.

Final Thoughts

Due diligence is both art and science. The questions above provide structure, but the real insight comes from the conversation, how traders think, how they respond under pressure, and how well their approach complements others in a portfolio.

The meeting is not the end of the process. It’s the beginning of understanding whether a trader can contribute meaningfully to long‑term, risk‑adjusted performance.