Posts Tagged ‘FCI CPP’

Q&A – Responding to a question on my previous post – “How Do We Calculate Management and Incentive Fees …”

Wednesday, March 10th, 2010

By Jamie Walters of FCI

A subscriber has written the following response to my ealier blog on how we calculate management and incentive fees in OSS and CPP. He writes “Thanks for the effort in explaining this but where did the $42 go in the CPP example?  How can the starting balance in month 2 be $51,875 if the $42 was debited from the account?  Is it actually billed in arrears?  Definitionally, isn’t “account equity” less all manner of fees including management fees?  Perhaps I have missed something here.”

Please refer to the original blog. My response to the subscriber follows:

Good question. The management fee is not billed in arrears. The management fee is billed on the first day of the month. For example, the February management fee is billed on the first day of February.

How can the starting balance in month two be $51,875? We calculate the monthly return based on the end-of-month account balance, which we refer to as the previous period’s ending net asset value (ENAV). All performance information is calculated on an accrual basis of accounting in accordance with generally accepted accounting principles. The beginning net asset value (BNAV) for the period shall represent the previous period’s ending net asset value (ENAV).

For an account that has just opened, we calculate the monthly return based on the BNAV. We do not subtract out the management fee that is billed on the first of the month to arrive at the BNAV. However, the ENAV for the first month will have the management fee deducted from it.

So in the CPP example that you are referring to in the blog, we calculate a 5% return before incentive fees as ($52,500 – $50,000) / $50,000. The account started with a $50,000 balance. This is the BNAV. The account ended with a $52,500 balance before incentive fees. That is how in the example, we have ($52,500 – $50,000) / $50,000. The $52,500 reflects the management fee that has been debited at the beginning of the period.

From $52,500, we debit the incentive fee for the period. In the example, the incentive fee was $625. This leaves a balance of $51,875 (=$52,500-$625), which is the ENAV.

By definition the ENAV for the period shall represent the BNAV plus or minus additions, withdrawals and redemptions, and net performance. Additions include both voluntary and involuntary additions. Withdrawals include both voluntary and involuntary withdrawals. Redemptions include both voluntary and involuntary redemptions. The net performance for the period represents the change in the net asset value net of additions, withdrawals, redemptions, fees and expenses.

Also, be aware that the return to the client is calculated as (ENAV – BNAV) / BNAV. In our hypothetical example, the return to the client is 3.75% (= $51,875 – $50,000) / $50,000, whereas the return before incentive fees was 5%. Just to be clear, the client would have seen a return of 3.75% net of all fees, not a return of 5%.

FCI would like to bring to your attention that there are substantial risks involved in trading futures and options on futures. The high degree of leverage that is often obtainable in commodity trading can work against you as well as for you. The volatile nature of the futures and high degree of leverage used in commodities may result in clients losing more than their original investment. Please consider carefully whether futures or options are appropriate to your financial situation.

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How Do We Calculate Management and Incentive Fees in the OSS and CPP Programs?

Friday, March 5th, 2010

By Jamie Walters of FCI

Friday, March 05, 2010 @ 5:37:17 PM EDT.

In the Credit Premium Program (CPP), the fee structure is as follows:

Management Fee: 1%
Incentive Fee: 25%

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Consider the following example for CPP.

Start Date: First day of the month.

Initial account value: $50,000

On the first day of the month we take a management fee of 1/12 of 1% from the beginning of the month account balance of $50,000. Thus, FCI would take $42.00 for management fees from a $50,000 funded account. This management fee is for the starting month.

Let’s say that the monthly return for CPP before incentive fees is 5%, for example. This means that the account value has grown by 5% from $50,000 to $52,500 by the start of the next month before incentive fees. Just to be clear, a 5% monthly return before incentive fees is calculated as:

($52,500 – $50,000) / $50,000, and not as ($52,456 – $49,958) / $49,958. In other words, the beginning-of-month account balance used in calculating the return for the month is not net of the management fee that is withdrawn at the beginning of the month.

On the beginning of the second month, we would take 25% of the profit added to the account from the prior period as incentive fees. Thus, we would collect $625 (= 25% of $2,500) on the beginning of the second month as incentive fees. This leaves the client account at an opening balance of $51,875 (= $52,500 – $625.00) for the first day of the second month.

On the first day of the second month we take a management fee of 1/12 of 1% from the beginning of the month account balance of $51,875. Thus, FCI would take $43 for management fees from a $51,875 beginning-of-period account balance on the first day of the second month. This management fee is the management fee for the second month.

The balance of $51,875 for the start of the second month is the new high-water mark for the account as of the first day of the second month. This means that FCI will not collect any incentive fees from the account at the end of the second month (first day of month three) unless the ending account balance on the last day of the period is above the high water mark of $51,875.

Note that in this example, the account experienced no additions or withdrawals of funds by the client. In addition, the account was started at the beginning of a period; in this case, at the beginning of the first month, and thus, no time-weighting is involved.

In the Option Selling Strategy (OSS), the fee structure is as follows:

Management Fee: 2%
Incentive Fee: 20%

Consider the following example for OSS.

Start Date: First day of the month

Initial account value: $50,000

On the first day of the month, we take a management fee of 1/12 of 2% from the beginning of the month account balance of $50,000. Thus, FCI would take $83.33 for management fees from a $50,000 funded account. This management fee is for the first month.

Let’s say that the monthly return for OSS before incentive fees is 5%, for example. This means that the account value has grown by 5% from $50,000 to $52,500 by the start of the second month before incentive fees. Just to be clear, a 5% monthly return before incentive fees is calculated as

($52,500 – $50,000) / $50,000, and not as ($52,412.50 – $49,916.33) / $49,916.33. In other words, the beginning-of-month account balance used in calculating the return for the month is not net of the management fee that is withdrawn at the beginning of the month.

On the beginning of the second month, we would take 20% of the profits added to the account from the prior period as incentive fees. Thus, we would collect $500 (= 20% of $2,500) on the first day of the second month as incentive fees. This leaves the client account at an opening balance of $52,000 (= $52,500 – $500.00) for day one of the second month.

On the first day of the second month, we take a management fee of 1/12 of 2% from the beginning of the month account balance of $52,000 Thus, FCI would take $86.66 for management fees from a $52,000 beginning-of-period account balance on the first day of the second month. This management fee is the management fee for the second month.

The balance of $52,000 for the start of month two is the new high-water mark for the account as of the beginning of month two. This means that FCI will not collect any incentive fees from the account at the end of month two (on day one of month three) unless the ending account balance on the last day of the period is above the high water mark of $52,000.

Note that in this example, the account experienced no additions or withdrawals of funds by the client. In addition, the account was started at the beginning of a period; in this case, at the beginning of the month, and thus, no time-weighting is involved.

Be advised that because FCI receives Incentive Fees, it may be inclined to trade in a more speculative manner than if it received only a percentage-of-assets fee. Please refer to the disclosure documents for either OSS or CPP for more information at http://www.financialii.com/financial-commodity-investments/disclosure-document.html

FCI would like to bring to your attention that there are substantial risks involved in trading futures and options on futures. The high degree of leverage that is often obtainable in commodity trading can work against you as well as for you. The volatile nature of the futures and high degree of leverage used in commodities may result in clients losing more than their original investment. Please consider carefully whether futures or options are appropriate to your financial situation.

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Futures Magazine’s “Top Traders of 2009″

Friday, February 26th, 2010

Futures Magazine’s “Top Traders of 2009″ includes a familiar face.Congratulations to Craig Kendall and the trading team at FCI for being recognized by Futures magazine as one of the Top Traders of 2009! See article preview below:

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It is no surprise that Financial Commodity Investments’ (FCI) Credit Premium Program (CPP) did well in 2009 — most option writing programs had a good year — but it was also up in 2008, making it quite unique. FCI President Craig Kendall is a certified public accountant and longtime investor with a pretty good sense of timing. He exited real estate in 2006 and took profits in equities before the dotcom bubble burst.

As an accountant who had helped take a couple of companies public, he was amazed at the valuations he was seeing in the late 1990s and knew he needed to diversify his holdings.

In the early 2000s, he opened an account with famed option writer Max Ansbacher and became a protégé of his. What struck Kendall about the strategy after a conversation with Ansbacher was its simplicity, so he went about creating his own advisory.

“First of all, in futures you have increased leverage and if you take some risk, the returns can be commendable but managing the risk is ever so important, especially in options writing. I don’t need to tell you that a lot of the competition is not around today,” Kendall says.

So in 2003 he became a registered CTA and investment advisor. He launched his Options Selling Strategy (OSS) in 2004 and the CPP in 2006. What distinguishes both of his programs is that they trade a diversified group of markets instead of concentrating on equity indexes as most options writers do. Each program has roughly $10 million under management.

“There were a lot of options writers out there and I thought why not take the same strategy and diversify it across different commodities,” Kendall says. “With this strategy we are really a short volatility play and there are times when the volatility on the S&P doesn’t warrant doing credit premium selling because the risk/return just isn’t worth it. But by doing the extra research and finding the volatility opportunities amongst various commodities [we find opportunities] to make good trades that can be a lot less risky than doing the S&P.   

Click here to continue…  then go to page 3.

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