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    Managed Futures For Institutional Investors: Analysis and Portfolio Construction

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    Juan Pablo Arango
    This document provides an overview of managed futures as an investment for institutional investors. It discusses common strategies used by commodity trading advisors (CTAs), including trend following. CTAs make money by exploiting trends in various futures markets through systematic quantitative trading programs. The document is structured in three parts, with Part I providing a practical guide to the managed futures industry, including how CTAs generate returns, sources of performance data, and structuring an investment. Part II discusses the building blocks of managed futures strategies, including how trend following works, benchmarking CTA performance, understanding drawdowns, and analyzing how market factors like volatility affect returns. Part III covers portfolio construction topics for institutional investors, such as evaluating individual CTAs versus constructing diversified

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    Managed Futures For Institutional Investors: Analysis and Portfolio Construction

    Uploaded by

    Juan Pablo Arango
    33 views6 pages
    This document provides an overview of managed futures as an investment for institutional investors. It discusses common strategies used by commodity trading advisors (CTAs), including trend following. CTAs make money by exploiting trends in various futures markets through systematic quantitative trading programs. The document is structured in three parts, with Part I providing a practical guide to the managed futures industry, including how CTAs generate returns, sources of performance data, and structuring an investment. Part II discusses the building blocks of managed futures strategies, including how trend following works, benchmarking CTA performance, understanding drawdowns, and analyzing how market factors like volatility affect returns. Part III covers portfolio construction topics for institutional investors, such as evaluating individual CTAs versus constructing diversified

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    This document provides an overview of managed futures as an investment for institutional investors. It discusses common strategies used by commodity trading advisors (CTAs), including trend following. CTAs make money by exploiting trends in various futures markets through systematic quantitative trading programs. The document is structured in three parts, with Part I providing a practical guide to the managed futures industry, including how CTAs generate returns, sources of performance data, and structuring an investment. Part II discusses the building blocks of managed futures strategies, including how trend following works, benchmarking CTA performance, understanding drawdowns, and analyzing how market factors like volatility affect returns. Part III covers portfolio construction topics for institutional investors, such as evaluating individual CTAs versus constructing diversified

    Copyright:

    © All Rights Reserved
    Download as PDF, TXT or read online from Scribd
    Download as pdf or txt
    33 views6 pages

    Managed Futures For Institutional Investors: Analysis and Portfolio Construction

    Uploaded by

    Juan Pablo Arango
    This document provides an overview of managed futures as an investment for institutional investors. It discusses common strategies used by commodity trading advisors (CTAs), including trend following. CTAs make money by exploiting trends in various futures markets through systematic quantitative trading programs. The document is structured in three parts, with Part I providing a practical guide to the managed futures industry, including how CTAs generate returns, sources of performance data, and structuring an investment. Part II discusses the building blocks of managed futures strategies, including how trend following works, benchmarking CTA performance, understanding drawdowns, and analyzing how market factors like volatility affect returns. Part III covers portfolio construction topics for institutional investors, such as evaluating individual CTAs versus constructing diversified

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    MANAGED FUTURES

    FOR INSTITUTIONAL
    INVESTORS
    L_____i_____L__

    Analysis and Portfolio Construction

    Galen Burghardf
    Brian Walls

    BLOOMBERG PRESS
    An Imprint of

    Contents
    Acknowledgments
    Introduction: Why Invest in CTAs?
    What Kind of Hedge Fund Is a CTA?
    Why Do CTAs Make Money?
    How Much Should You Invest?
    What About the Risks?
    They're a Good Fit for Institutional Investors
    How the Book Is Structured

    xiii
    1
    1
    2
    7
    9
    10
    11

    PART I: A PRACTICAL GUIDE TO THE INDUSTRY


    CHAPTER 1
    Understanding Returns
    Risk and Cash Management
    Trading, Funding, and Notional Levels
    The Stability of Return Volatilities
    Basic Futures Mechanics
    A Typical Futures Portfolio

    CHAPTER 2
    Where Are the Data?
    The CTA Universe and Your Range of Choices
    The Fluid Composition of a Database
    How Backfilled Data Can Mislead
    Trading Programs and Lengths of Track Records
    Returns Net of Fees and Share Classes
    Sources of Data for Indexes of CTA Performance

    17
    18
    19
    19
    20
    27

    41
    42
    44
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    50

    CHAPTER 3
    Structuring Your Investment: Frequently Asked Questions 53
    How Many Managers Should You Choose?
    What Are CTA Funds?
    What Are Multi-CTA Funds?

    55
    58
    60
    Vll

    viii

    Contents

    What Are Managed Accounts?


    What Are Platforms?
    How Do You Compare and Contrast These Offerings?
    Who Regulates CTAs?
    How Are Structured Notes and Total Return Swaps Used by CTA Investors?
    What Are the Account Opening Procedures for a Managed Account?
    What Is the Minimum Investment in a CTA?
    What Does It Mean When a Manager Is Closed?
    What Are the Subscription Procedures for a Fund?
    Conclusion
    -

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    71
    71
    71
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    PART II: BUILDING BLOCKS


    CHAPTER 4
    How Trend Following Works
    The Two Basic Strategies
    Making the Systems Work in Practice
    Transactions Costs
    Other Considerations
    Case Study: Two Models from 1994-2003
    Rates of Return and Leverage
    Commodities and Capacity Constraints
    Market Environment and Give-Backs

    CHAPTER 5
    Two Benchmarks for Momentum Trading
    Data and the Trend-Following Sub-Index
    Trend-Following Models
    Laying the Groundwork for Analyzing Returns to Trend Following
    Constructing a Portfolio
    Simplifying Assumptions
    How Did the Models Do?
    The Newedge Trend Indicator
    Next Steps

    CHAPTER 6
    The Value of Daily Return Data
    How Good Are Daily Data?
    Estimating Return Volatility
    Distributions of Estimated Volatility
    Beware a False Sense of Confidence
    What If Underlying Returns Are Highly Skewed?
    Effect on Drawdown Distributions

    75
    76
    79
    87
    87
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    108
    108
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    124
    124

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    145
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    148

    Contents

    CHAPTER 7
    Every Drought Ends in a Rainstorm: Mean Reversion,
    Momentum, or Serial Independence?

    IX

    151

    A Focus on Conditional Returns


    152
    The Costs of Being Wrong about Timing Investments Can Be Substantial 152
    The Data
    153
    The Test Tally
    155
    Test for Serial Dependence: Autocorrelation
    156
    Test for Serial Dependence: Runs
    163
    Conditional Return Distributions
    - "
    165
    Conclusion
    . 175

    CHAPTER 8
    Understanding Drawdowns
    Drawdown Defined
    What Should They Look Like?
    What Forces Shape the Distributions?
    The Distribution of All Drawdowns
    The Distribution of Maximum Drawdowns
    The Core Drawdown Function
    Empirical Drawdown Distributions
    Reconciling Theoretical and Empirical Distributions
    Putting a Managers Experience in Perspective
    What about Future Drawdowns?
    Further Questions

    CHAPTER 9
    How Stock Price Volatility Affects Returns
    A Look at Historical Returns
    Stock Price Volatility and Returns on the S&P 500
    S&P 500 Volatility Dominates Market Volatility
    CTA Returns, Correlations, and Volatility
    Conclusion

    CHAPTER 10
    The Costs of Active Management
    Forgone Loss Carry-Forward
    Liquidation and Reinvestment
    Other Costs
    Conclusion

    CHAPTER 11
    Measuring Market Impact and Liquidity
    A Very Fat Data Set

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    Contents
    A Representative Market Maker
    Fitting the Curve to the Data
    Hidden Liquidity
    Estimating the Risk-Aversion Parameter
    Volume, Volatility, and Market Impact Profiles
    Where Do We Go from Here?
    Appendix

    234
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    PART III: PORTFOLIO CONSTRUCTION


    CHAPTER 12
    Superstars versus Teamwork

    253

    The Contribution of Low Correlation to Portfolio Performance


    How Reliable Are Correlation Estimates?
    The Contest
    Dropping and Adding Managers
    The Value of Incremental Knowledge about Return Distributions
    The Costs of Dropping and Adding Managers

    255
    256
    262
    270
    275
    277

    CHAPTER 13
    A New Look at Constructing Teamwork Portfolios

    279

    Why Look Back?


    A Fresh Look at the Original Research
    Two New Approaches
    Comparing the Four Approaches
    Reviewing the Results

    CHAPTER 14
    Correlations and Holding Periods: The Research Basis
    for the Newedge AlternativeEdge Short-Term
    Traders Index
    Review of Previous Research
    Index Methodology and Construction
    How Low Are the Correlations?
    Why Are the Correlations Low?
    Holding Period and Return Correlation
    Why Are There Not More Short-Term Traders?
    Replicating the Index
    Cautions and Managing the Index
    Conclusion
    Appendix

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    316

    Contents

    CHAPTER 15
    "There Are Known Unknowns": The Drag of Imperfect
    Estimates
    Improving Risk-Adjusted Returns
    Throwing Out the Losers
    Due Diligence and Evaluation

    Bibliography
    About the Authors
    Index

    XI

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