What is a 'Commodity Pool'

A commodity pool is a private investment structure that combines investor contributions to trade futures and commodities markets. The commodity pool, or fund, is used as a single entity to gain leverage in trading, in the hopes of maximizing profit potential. The title "commodity pool" is a legal term as set forth by the National Futures Association (NFA). Commodity pools in the United States are regulated by the Commodity Futures Trading Commission (CFTC) and the National Futures Association, rather than by the Securities and Exchange Commission, which regulates other market activity. Commodity pools are also called "managed futures funds."

BREAKING DOWN 'Commodity Pool'

Commodity pools are similar to mutual funds in that investors pool assets to make trades that would not be possible for an individual investor. The investor's risk is limited to the amount of his or her financial contribution to the commodity pool. Many hedge funds – private pools of activity managed capital – are commodity pools, and are registered with the Commodity Futures Trading Commission as commodity pools and Commodity Trading Advisors (CTAs). Commodity pools are run by an operator who is an individual or organization that receives funds to use in the operation of a commodity pool, syndicate, investment trust, or another similar fund, specifically for trading commodities.

Commodity Pool ETFs

A simplified method for retail investors to obtain market access is through Exchange Traded Funds (ETFs). These funds are similar to mutual funds but tend to have much lower costs. Commodity ETFs are a form of commodity pool where investors pool financial resources to gain access to commodity futures markets. One reason for the explosive growth of the ETF industry is that they have dramatically expanded the way that investors can trade commodities. ETFs tend to be less regulated than mutual funds. For example, according to etfanalyst.com, many commodity ETFs are set up as a commodity pool that is not subject to regulation under the Investment Company Act of 1940.

Advantages of a Commodity Pool

There are two main advantages to trading commodities in a commodity pool. As mentioned earlier, investors gain leverage in trading. Investors joining a pool with a number of different investors have better purchasing power. They get a lot more leverage and diversification by trading a $1 million account as opposed to a $10,000 account. Second, commodity pools tend to be structured as limited partnerships, which has both tax and risk benefits.

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