Definition
The term commodity pool operator refers to an individual or organization that is responsible for soliciting funds and investing those funds in futures and options contracts. Participating in commodity pools allows investors to gain leverage while reducing risk.
Explanation
Also referred to as managed futures funds, commodity pool is a legal term defined by the National Futures Association, which provides the following definition:
"A commodity pool operator (CPO) is an individual or organization that operates a commodity pool and solicits funds for that commodity pool. A commodity pool is an enterprise in which funds contributed by a number of persons are combined for the purpose of trading futures or options on futures, retail off-exchange forex contracts, or swaps, or to invest in another commodity pool."
Commodity pools can be compared to mutual funds since they allow individual investors to pool their assets and conduct trades that would otherwise not be possible. Since the investor's funds can be spread over a larger number of trades, commodity pools can also reduce risk through diversification. A commodity pool operator will both solicit funds from investors as well as make investment decisions on behalf of the pool. A CPO may also hire a Commodity Trading Advisors (CTA) to make those investment decisions, which include futures, options, forex contracts, and swaps.