Commodity Pool
What Is a Commodity Pool?
A commodity pool is a private investment structure that joins investor contributions to trade the futures and commodities markets. The commodity pool, or fund, is utilized as a single entity to gain leverage in trading, with expectations of boosting profit potential. The title "commodity pool" is a legal term as set forward by the National Futures Association (NFA). Commodity pools are likewise called "managed futures funds."
How a Commodity Pool Works
Commodity pools are funds that contain a pool of capital from numerous investors wherein the contributed money is combined and invested by the commodity pool investment management team. Commodity pool investments commonly use leverage, which is borrowed money from a broker intended to amplify the returns on the investment. Commodity pools are like mutual funds, which are funds of pooled money that invest in a basket of securities, including stocks.
Numerous hedge funds- private pools of activity managed capital-are commodity pools. Be that as it may, rather than investing in stocks, commodity pools invest in a basket of commodity futures contracts and options. A futures contract is an agreement to buy or sell a commodity or security at a preset price, quantity, and time from now on. Futures contracts have normalized amounts and settlement dates and are traded on a futures exchange.
Options contracts are like futures and give the holder the right to buy or sell the underlying asset at a preset price and date. Be that as it may, options are more flexible than futures since they have more expiration dates accessible, and the contract sizes can be altered. The two futures and options contracts are considered derivatives since the contracts get their value from an underlying commodity or security. A commodity pool's futures and options contracts can remember investments for gold, silver, corn, crude oil, and wheat.
Commodity Pool Operators
A principal or partner in the firm or fund would be in charge of the financial interests inside the commodity pool. The commodity pool operator gets the funds to use in the operation of a commodity pool, syndicate, investment trust, or another comparable fund, explicitly for trading commodities. The commodity pool operator would frequently request investors to acquire new funds or capital for the commodity pool.
Commodity Pool Regulators
Commodity pools in the United States are regulated by the Commodity Futures Trading Commission (CFTC) and the National Futures Association, as opposed to by the Securities and Exchange Commission (SEC), which controls other market activity.
Hedge funds that are commodity pools must be registered with the Commodity Futures Trading Commission as commodity pools and Commodity Trading Advisors (CTAs). CTAs are like financial advisors in that they are registered advisors, yet rather than giving stock exhortation, CTAs prompt investors on commodity investing.
Commodity Pool ETFs
A simplified method for retail investors to get market access is through exchange traded funds (ETFs). These funds are like mutual funds however will quite often have a lot of lower costs. Commodity ETFs can be a type of commodity pool where investors pool financial resources to gain access to commodity futures markets. One justification for the dangerous growth of the ETF industry is that they have emphatically expanded the way that investors can gain access to commodities.
Be that as it may, not all commodity ETFs invest in commodity futures. Some commodity-based ETFs hold the stocks of commodity-delivering companies, for example, gold mining and oil drilling companies. Other commodity ETFs buy and hold the physical commodity itself and store the investment in a vault. A gold or silver ETF, for instance, could hold the physical commodity. Before investing in a commodity-based ETF, investors ought to research what type of holdings are in the fund.
Benefits of a Commodity Pool
Commodity pools give a number of benefits to investors in lieu of investing in the individual commodities that are held inside the fund.
Professional Management
Commodity pools benefit investors since they gain access to trades that wouldn't be feasible for an individual investor. Investing in futures and options contracts can be very complex, and by conceding to an expert that is licensed to trade derivatives, investors set aside cash from the expected expensive missteps of acting like a lone ranger while investing in commodity futures.
Leverage
Investors gain leverage in trading, meaning they get a pool together with a number of various investors, which expands their purchasing power. Investors gain more leverage and diversification, for instance, by trading a $1million pooled account rather than a $10,000 individual account had the investor gone solo.
Defined Risk
Be that as it may, the risk of investing in commodity pools is limited to the amount of the investor's financial contribution to the commodity pool. Futures contracts frequently utilize borrowed funds from a broker, yet regardless of how big the fund's losses are due to that leverage, the investor is at risk for just the amount they contributed. The limited risk is due, in part, to the structure of commodity pools in that they're normally settled as limited partnerships.
Subsequently, investors have some control over the amount of money they need to dispense to a commodity pool, contingent upon their risk tolerance, age, financial standing, and time horizon for investing. Notwithstanding, investors who are unfamiliar with commodities, futures, and options ought to look for help from an investment advisor to determine whether a commodity pool is the right investment for them.
Features
- The risk of investing in commodity pools is limited to the amount of an investor's financial contribution to the fund.
- A commodity pool is a private investment structure that consolidates investor contributions to trade futures and options in commodities.
- The commodity pool, or fund, is utilized as a single entity to gain leverage in trading, with expectations of expanding profit potential.
