managed futures Concepts

Commodity Trading Advisors: Risk, Performance Analysis, and Selection

by Greg N. Gregoriou, Vassilios Karavas, François-Serge Lhabitant and Fabrice Douglas Rouah · 23 Sep 2004

203 Bhaswar Gupta and Manolis Chatiras CHAPTER 11 Managing Downside Risk in Return Distributions Using Hedge Funds, Managed Futures, and Commodity Indices 220 Mark Anson PART THREE Managed Futures Investing, Fees, and Regulation 233 CHAPTER 12 Managed Futures Investing 235 James Hedges IV Contents CHAPTER 13 The Effect of Management and Incentive Fees on the

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we believe are vital for proper selection and monitoring of CTAs. These issues include performance assessment, benchmarking, and risk management of managed futures investing, evaluation and design of managed futures programs, CTA management and incentive fees, and regulatory considerations. All chapters in this book are written by leading academics and practitioners in the

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and more quickly than hedge funds can, and without the undesirable consequences that often accompany hedge fund allocations. Portfolios consisting of both hedge funds and managed futures are shown to exhibit even more desirable diversification properties. Chapter 2 presents an original methodology for constructing a representative and pure commodity trading advisor (

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possible remedies does not end here. Any asset or asset class that has suitable (co-)skewness characteristics can be used. One obvious candidate is managed futures. Managed futures programs are often trend-following in nature. In essence, what these programs do is somewhat similar to how option traders hedge a short call position

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to significantly improve the overall risk characteristics of their portfolio without, under the assumptions made, giving up much in terms of expected return. MANAGED FUTURES The asset class “managed futures” refers to professional money managers known as commodity trading advisors (CTAs) who manage assets using the global futures and options markets as their

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0.08 0.19 Table 1.3 for 33/66 investors, except that the drop in skewness is much more pronounced. With managed futures the picture is different. If the managed futures allocation increases, the standard deviation drops faster than with hedge funds. More remarkably, skewness rises instead of drops while kurtosis drops

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–1.00 100 80 20 60 % in Alternatives Portfolio 0 40 60 40 20 100 80 % in Managed Futures FIGURE 1.5 Kurtosis 50/50 Portfolios of Stocks, Bonds, Hedge Funds, and Managed Futures 15 Managed Futures and Hedge Funds 3.00 2.50 2.00 1.50 1.00 0.50 0.00 –0

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returns over the last three years combined. The model was estimated assuming cross-sectional heteroskedasticity and fixed effects 45 Performance of Managed Futures TABLE 3.10 Regressions of Monthly Managed Futures Returns against Lagged Returns and Lagged Standard Deviation Regressor Average returns 1–12 months ago Average returns 13–24 months ago Average

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sample of 200 CTAs over the period January 1998 to July 2003. Chapter 11 provides a simple method for measuring the downside protection offered by managed futures. Managed futures are generally considered to help reduce the downside exposure of stocks and bonds. The chapter also measures the downside protection provided by hedge funds

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liquidate their positions (or reverse them) when they detect that the momentum is changing or about to change. 183 184 RISK AND MANAGED FUTURES INVESTING Whether we call managed futures trend-following or momentum strategies, they have one important characteristic: They capitalize on the volatility in the futures market. Trend-following strategies tend

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to estimate the value at risk for longvolatility strategies. Last, we demonstrate some practical risk management strategies that may be employed with managed futures. BRIEF REVIEW OF THE MANAGED FUTURES INDUSTRY Managed futures is often referred to as an absolute return strategy because their return expectations are not driven by broad market indices, such as

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also use volatility models such GARCH (generalized auto-regressive conditional heteroskedasticity) to forecast both price trends and volatility changes. Prior empirical studies have indicated that managed futures, or commodity trading advisors, have investment strategies that tend to be long volatility. Fung and Hsieh (1997a) found that trend-following styles have a

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—a long volatility position. Fung and Hsieh (1997b) documented that commodity trading advisors apply predominantly trend-following strategies. Measuring the Long Volatility Strategies of Managed Futures 185 In our research we use three Barclay Commodity Trading Advisor indices to capture the trading dynamics of the CTA market: Commodity Trading Index, Diversified

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as well as the maximum loss are approximately onehalf of that for merger arbitrage alone. These results demonstrate the complementary behavior of managed futures with merger arbitrage. The combination of managed futures with merger arbitrage greatly reduces the risk of loss compared to merger arbitrage as a stand-alone investment. Our work supports

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than $40 billion as of June 2003. This growth has led to closer scrutiny of the diversification properties as well as risk management of managed futures. The term “managed futures” represents an industry composed of professional money managers known as commodity trading advisors (CTAs) who manage client assets on a discretionary basis using

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reduction of cumulative return potential. In every other instance, downside risk protection was achieved in combination with increased return potential. Managing Downside Risk with Managed Futures Managed futures refers to the active trading of futures contracts and forward contracts on physical commodities, financial assets, and currencies. The purpose of the

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, trend followers, and systematic. However, these categories tend to overlap. As investors become increasingly educated about the universe of alternative investments and, in particular, managed futures, CTAs will continue to grow in popularity. Chapter 13 empirically investigates the effect of incentive compensation contracts of commodity trading advisors on their performance. The

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of applying this model to the diverse range of fiduciary futures products and discusses recent proposals to reform the regulation of individually managed futures accounts. CHAPTER 12 CHAPTER 12 Managed Futures Investing James Hedges IV anaged futures investing is increasing in popularity as investors look for ways to profit in a volatile environment

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-year investment. As is the case with any investment strategy, investors must evaluate both qualitative and quantitative factors before determining whether to allocate capital to managed futures. Such factors include, but are not limited to, investment time horizon, level of risk aversion, level of diversification of existing portfolio, and intended

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market exposures (see Figure 12.3). Advantages of managed futures investing include: low to negative correlation to equities and other hedge funds; negative correlation to equities and hedge funds during periods of poor performance; diversified

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liquidity; 238 $10,000 $9,000 $8,000 $7,000 $6,000 $5,000 $4,000 $3,000 $2,000 $1,000 $0 MANAGED FUTURES INVESTING, FEES, AND REGULATION Managed Futures Index (Zurich CTA–$) Stock Market Correction Mideast Oil Crisis Global Bond Market Reversal Stocks (S&P 500 Index) +16% +11% –6% –4% +

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investing in a number of fundamental ways, including transparency, liquidity, regulatory oversight, and the use of exchanges. These underlying distinctions provide support for adding managed futures investments to a portfolio that includes both traditional and alternative investments. Because futures contracts are, by definition, traded on organized exchanges across the globe, the

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12.5). Again, the exchange-based nature of futures contracts plays a significant role. Positions can be entered into and exited continuously, regardless 239 Managed Futures Investing Financial Markets Currencies Stock Indices The Americas Major U.S. Europe Minor Europe Asia Exotic Asia Interest Rates Commodity Markets Agriculture Grains Metals Energy

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liquidity, and professional management, yet they lack the potential to profit in bear markets (see Table 12.1). TABLE 12.1 Mutual Funds versus Managed Futures Mutual Funds Managed Futures Diversification Professional Management Highly Regulated: SEC & States Liquidity: Daily Potential Profit in Bull Markets: Yes Potential Profit in Bear Markets: No Diversification Professional

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Management Highly Regulated: CFTC & NFA Liquidity: Daily Potential Profit in Bull Markets: Yes Potential Profit in Bear Markets: Yes Source: www.usafutures.com 240 MANAGED FUTURES INVESTING, FEES, AND REGULATION REGULATORY ISSUES The Commodity Futures Trading Commission (CFTC) was created by Congress in 1974 as an independent agency with the mandate

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The difficulties of applying this model to the diverse range of fiduciary futures products is discussed, and recent proposals to reform the regulation of individually managed futures accounts are examined. T INTRODUCTION Hedge funds and other alternative fiduciary investment products (products where investors have provided funds to a professional fund manager

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the funds entrusted to it by its clients, by utilizing those funds to trade futures contracts—come in two varieties in Australia: managed futures funds and individually managed futures accounts. Managed futures funds are structured along the same lines as mutual funds and hedge funds in Australia. The cash contributions of several investors are pooled

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Eurex; Chicago Mercantile Exchange; Chicago Board of Trade; Euronext-LIFFE; Euronext-Paris; Brazilian Mercantile & Futures Exchange; Chicago Board Options Exchange; and Tel Aviv Stock Exchange. Managed Futures Funds and Other Fiduciary Products 263 ing volumes (Ali 2002). The other classes of product traded on the SFE are Australian dollar, cattle, electricity, and

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Futures Products in Australia All fiduciary investment products, whether fiduciary futures products or hedge funds and whether offered to retail or institutional investors, are 264 MANAGED FUTURES INVESTING, FEES, AND REGULATION potentially subject to Chapter 5C of the Australian Corporations Act 2001, which regulates “managed investment schemes,” and Chapter 7, which

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including the design and implementation of its investment strategy) is in the hands of a third party, not the investors. Managed Futures Funds Managed futures funds clearly satisfy these requirements. Investors in a managed futures fund invest by purchasing or subscribing for interests in the fund; the fund manager pools the consideration they provide for the

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IMAs (they are managed investment schemes, albeit unregistrable ones) are subject to more onerous regulatory requirements than retail IMAs. CONCLUSION The regulation of managed futures funds and individually managed futures accounts in Australia is characterized by a “bottom-up” approach. These investment products are subject to the same regulatory regime—a combination of

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or shares. It is, however, a major issue for Australian securitization programs, including collateralized synthetic obligations, an innovative investment product very similar to a managed futures fund. It is also a major issue for collateralized private equity obligations and collateralized fund of hedge fund obligations, which are securitizations of equity interests

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hedge funds respectively (Ali, Stapledon, and Gold 2003). Finally, the current proposals to streamline the regulation of retail individually managed accounts (including retail individually managed futures accounts) in Australia will, if implemented, result in the unusual spectacle of a retail investment product being subjected to less onerous regulation than its wholesale

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portfolio allocation. Different statistics and portfolio frameworks (with two or three dimensions) are then considered. Each brings new information and helps in understanding the managed futures universe. Note that the three-dimensional framework used with portfolio allocations is definitively the “pioneering” part of this study. The chapter is organized in

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coefficient to measure nonlinear relationships. Contrarily to the majority of hedge fund strategies, the histogram of TABLE 23.2 Statistics of the CSFB-Tremont Managed Futures Index CSFB/Tremont Managed Futures Index Return (% p.a.) Volatility (% p.a.) Skewness Kurtosis Normality (Bera Jarque test, 95%) S&P 500 SSB World Gvt. Bond Index

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of Relative Commodity Trading Advisor Performance.” Unpublished thesis, University College Dublin, Ireland. McCarthy, D., T. Schneeweis, and R. Spurgin. (1996) “Investment Through CTAs: An Alternative Managed Futures Investment.” Journal of Derivatives, Vol. 3, No. 4, pp. 36–47. McCarthy, D., T. Schneeweis, and R. Spurgin. (1997) “Informational Content in Historical CTA

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Record and Performance in Hedge Funds.” CISDM, Working Paper, Isenberg School of Management, University of Massachusetts, Amherst, MA. Schneeweis, T., and R. Spurgin. (1997) “Managed Futures, Hedge Funds and Mutual Fund Return Estimation: A Multifactor Approach.” CISDM Working Paper, Isenberg School of Management, University of Massachusetts, Amherst, MA. Schneeweis, T., and

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R. Spurgin. (1998a) “Multifactor Analysis of Hedge Funds, Managed Futures, and Mutual Fund Return and Risk Characteristics.” Journal of Alternative Investments, Vol. 1, No. 1, pp. 1–24. Schneeweis, T., and R. Spurgin. (1998b)

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“Quantitative Analysis of Hedge Funds and Managed Futures: Returns and Risk Characteristics.” CISDM Working Paper, Isenberg School of Management, University of Massachusetts, Amherst, MA. Schneeweis, T., R. Spurgin, and G. Georgiev. (2001) “

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as financial products, 269–270 and fiduciary futures products in Australia, 261–264 and futures market in Australia, 262–263 for individually managed futures accounts, 266–267, 270–272 for managed futures funds, 264–265 and registration of fiduciary futures products, 267–269 Auto-regressive moving average (ARMA) models, 367–376 Backfilling bias,

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, 15–16 estimating returns on, 18–19 investment style and portfolio returns with, 9–10 large, market volatility and, see Market volatility managed futures as subset of, 80 managed futures combined with, 11 risk and dependence characteristics of, 5–6 short-volatility strategies for, 198 survivorship bias for CTAs vs., 19 Tremont TASS

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futures, 229–231 diversification for, 244 downside, 220–232 with hedge funds, 224–226 leverage for, 245 long volatility strategies for, 198–201 with managed futures, 226–229 managed futures for, 14 stop losses for, 244–245 Risk management step (trading program), 284–287 Rolling windows, 311, 313–315 Russell 3000 Index, 111–

The Prize: The Epic Quest for Oil, Money & Power

by Daniel Yergin · 23 Dec 2008 · 1,445pp · 469,426 words

Trend Following: How Great Traders Make Millions in Up or Down Markets

by Michael W. Covel · 19 Mar 2007 · 467pp · 154,960 words

efforts and support. And thank you to the following publications and writers who generously allowed me to quote from their work: Sol Waksman and Barclay Managed Futures Report, Futures Magazine, Managed Account Reports, Michael Rulle of Graham Capital Management, and Technical Analysis of Stocks and Commodities Magazine. I am also indebted to

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are Seykota’s performance numbers? “Seykota earned, after fees, nearly 60 percent on average each year from 1990 to 2000 managing proprietary money in his managed futures program.”51 But Seykota is different than Harding, Henry, and Dunn. He literally has been a one-man shop his entire career. There is no

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, which include stocks: “We always are looking for non-correlated absolute return strategies that can produce higher quality risk adjusted returns; whether that is more managed futures strategy models or long/short equities or whatever. We have 30 years of experience doing long/short stock indexes, bond futures, and currencies; to do

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who developed the foundations of the modern theory of finance. Long before Harvard’s John Litner published his quantitative analysis of the benefits of including managed futures in a portfolio with stocks and bonds, Donchian used concepts like diversification and risk control, key elements of modern portfolio theory that won William Sharpe

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picture of trend following. Trend trader David Harding of Winton Capital offered insight: “A key measure of track record quality and strategy ‘riskiness’ in the managed futures industry is drawdown, which measures the decline in net asset value from the historic high point. Under the Commodity Futures Trading Commission’s mandatory disclosure

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regime, managed futures advisors are obliged to disclose as part of their capsule performance record their ‘worst peak-to-valley drawdown.’ As a description of an aspect of

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comparisons help to show that trend following is a legitimate style and demonstrate the similarity of performances Maryland-based Campbell and Co., a trend following managed futures firm with almost $3 billion in assets under management, has returned 17.65 percent since its inception in 1972, proving that performance can be sustainable

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it’s all at. The hedge fund world had fallen apart, equities had gone Chapter 4 • Big Events, Crashes, and Panics into the toilet, and managed futures were king and on the front page of The Wall Street Journal. So some of this is the psychology of what we do.”40 The

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Jerry Parker, for one, thinks trend followers could do better at explaining their skill set: “I think another mistake we made was defining ourselves as managed futures, where we immediately limit our universe. Is our expertise in that, or is our expertise in systematic Chapter 11 • The Game trend following or model

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revised ed. Irvington-on-Hudson, NY: The Foundation for Economic Education, Inc., 1996, printed 1998. First published in 1949. 6. Barclay Trading Group, Ltd. Barclay Managed Futures Report. Vol. 3, No. 3 (Third quarter 1992), 3. 399 400 Trend Following (Updated Edition): Learn to Make Millions in Up or Down Markets 7

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. 31, No.13 (October 2002), 90. 22. Denise G. Shekerjian, Uncommon Genius. New York: Penguin Books, 1990. 23. Mary Ann Burns, Industry Icons Assess the Managed Futures Business. Futures Industry Association (May/June 2003). 24. Jack Reerink, Dunn: Slow Reversal Pays Off. Futures, Vol. 25, No. 3 (March 1996). 25. Carla Cavaletti

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. Futures Vol. 27, No. 1 (January 1998), 68. 26. Excerpt from Dunn Capital Management Monthly Commentary for February 2003. 27. Barclay Trading Group, Ltd. Barclay Managed Futures Report. Vol. 3, No. 3 (Third quarter 1992), 2. 28. Monster.com ad. 29. Ginger Szala, John W. Henry: Long-Term Perspective. Futures (1987). Endnotes

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September 15, 1998. 31. Lois Peltz, The New Investment Superstars. New York: John Wiley & Sons, Inc., 2001. 32. Mary Ann Burns, Industry Icons Assess the Managed Futures Business. Futures Industry Association (May/June 2003). 33. Mark S. Rzepczynski, John W. Henry & Co. Year in Review, December 2000. 34. Oliver Conway, Cover story

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Tribe at Seykota.com. See www.seyokota.com/tribe/. 50. Email to TurtleTrader.com. 51. Daniel P. Collins, Long-Term Technical Trend-Following Method for Managed Futures Programs. Futures, Vol 30, No. 14 (November 2001); 22. 52. The Trading Tribe at Seykota.com. See www.seyokota.com/tribe/. 53. Thom Hartle, ed

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(July 1992), 52. 68. Futures Industry Association Conference Excerpt. Campbell and Company. 69. Mary Ann Burns, Industry Icons Assess the Managed Futures Business. Futures Industry Association (May/June 2003). 70. Value of Adding Managed Futures. Marketing Documents. Campbell and Company. 71. 2003 Disclosure Document. Campbell and Company. 72. Desmond McRae, 31-Year Track Record

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of 18.1%. Managed Account Reports: Extracting Inherent Value from Managed Futures (March 2003). 73. Barclay Trading Group, Ltd. Barclay Managed Futures Report. Vol. 2, No. 3 (Third quarter 1991), 2. 74. The Futures and Industry Association’s Future and Options Expo ‘98

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Epstein, The World According to J. Parker. Managed Account Reports (November 1998). 80. Barclay Trading Group, Ltd. Barclay Managed Futures Report. Vol. 2, No. 3 (Third quarter 1991), 7. 81. Barclay Trading Group, Ltd. Barclay Managed Futures Report. Vol. 2, No. 3 (Third quarter 1991), 2. 82. Simon Romero, A Homespun Hedge Fund, Tucked

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or Down Markets 96. Jack Schwager, Market Wizards: Interviews with Top Traders. New York: New York Institute of Finance, 1989. 97. Barbara Dixon, Richard Donchian: Managed Futures Innovator and Mentor. Futures Industry Association. 98. William Baldwin, Rugs to Riches (Section: The Money Men), Forbes (March 1, 1982). 99. Barbara Dixon, Richard Donchian

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: Managed Futures Innovator and Mentor. Futures Industry Association. 100. Barbara Dixon, Richard Donchian: Managed Futures Innovator and Mentor. Futures Industry Association. 101. Barbara Dixon, Richard Donchian: Managed Futures Innovator and Mentor. Futures Industry Association. 102. William Baldwin, Rugs to Riches (Section: The

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Money Men), Forbes (March 1, 1982). 103. Barbara Dixon, Richard Donchian: Managed Futures Innovator and Mentor. Futures Industry Association. 104. William Baldwin, Rugs to Riches (Section: The Money Men), Forbes (March 1, 1982). 105. Futures Industry Association Review:

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Capital Management. 12. Larry Harris, Trading and Exchanges: Market Microstructure for Practitioners. New York: Oxford University Press, 2003. 13. Ben Warwick, The Holy Grail of Managed Futures (cover story). Managed Account Reports (MAR), No. 267 (May 2001), 1. 14. The Trading Tribe at Seykota.com. See www.seyokota.com/tribe/. 15. Definition

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, Vol. 27, No. 1 (January 1998), 68. 24. Thomas F. Basso, When to Allocate to a CTA?—Buy Them on Sale. 25. New Fans for Managed Futures. Euromoney Institutional Investor PLC (February 1, 2003), 45. 26. InvestorWords.com. See http://investorwords.com. 27. Julius A. Staniewicz, Learning to Love Non-Correlation. Investor

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S. Rzepczynski, President, John W. Henry and Co., Presentation. See www.jwh.com. 13. Erin E. Arvedlund, Swinging for the Fences: John W. Henry’s Managed Futures Funds Are Striking Out. Barrons (December 4, 2000). 14. Speech given to financial consultants on November 17, 2000. See www.jwh.com. 15. Erin E

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, 2000. See www.jwh.com. 18. Pallavi Gogoi, Placing Bets in a Volatile World. Businessweek (September 30, 2002). 19. Email to TurtleTrader.com. 20. Barclay Managed Futures Report. Barclay Trading Group (Fourth Quarter 2002). 21. Larry Swedroe, Buckingham Asset Management. See: http://www.bamstl.com/. 22. The Trading Tribe at Seykota.com

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, No. 2 (February 1997). Endnotes 48. David Henry, USA Today, October 30, 1997. 49. http://www.thestreet.com/funds/fwfeatures/626822.html. 50. Source: Barclay Managed Futures Report. 51. Mark Etzkorn, Bill Dunn and Pierre Tullier: The Long Run (Trader Profile). Futures, Vol. 26, No. 2 (February 1997). 52. Source: The Stark

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10, 1997). 61. Malcolm Gladwell, The New Yorker, April 22 and 29, 2002. 62. Source: IFCI International Financial Risk Institute. 63. Mark Hawley, Dean Witter Managed Futures, Futures Industry Association Dinner, New York City, April 20, 1995. 64. Presentation in Geneva, Switzerland on September 15, 1998. 65. Sharon Reier, Easy to Beat

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Down Markets 71. Marketing Materials. John W. Henry and Company, September 1998. 72. Barclay Trading Group, Ltd., Technical vs. Fundamental: How Do Traders Differ? Barclay Managed Futures Report, Vol. 2, No. 3 (2000). 73. Sir Arthur Conan Doyle, The Sign of Four. London and New York: Pitman and Sons, 1890. 74. Christopher

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Pimps, Punters and Equities. The Economist (March 24, 2001). 2. Crossfire. CNN (December 21, 1999). 3. Richard Rudy, Buy and Hold: A Different Perspective. Barclay Managed Futures Research (Fourth quarter 2001). 4. Buy it now! For a fine keepsake of the Internet boom! Review of Dow 36000 by James Glassman, Amazon.com

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, 2001. 5. Jerry Parker, The State of the Industry. Managed Account Reports, Inc. (June 2000). 6. Richard Rudy, Buy and Hold: A Different Perspective. Barclay Managed Futures Research (Fourth quarter 2001). 7. William R. Gallacher, Winner Take All. New York: McGraw-Hill, 1994. 8. David Dukcevich. Forbes (May 6, 2002). 9. James

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. New York: Oxford University Press, 2003. 10. Going Once, Going Twice. Discover (August 2002), 23. 11. Jim Little, Sol Waksman, A Perspective on Risk. Barclay Managed Futures Report. 12. Craig Pauley, How to Become a CTA. Based on Chicago Mercantile Exchange Seminars, 1992–1994. June 1994. 13. Thomas L. Friedman, The Lexus

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of Hitting. New York: Simon & Schuster, 1986, 7. 25. Desmond McRae, 31-Year Track Record of 18.1%. Managed Account Reports: Extracting Inherent Value from Managed Futures (March 2003). 26. Daniel Colton, Trading the Pain Threshold (Trader Profile: Mark van Stolk). Futures (November 2003), 98. 27. Ludwig von Mises, Human Action: A

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the Olive Tree. New York: Farrar, Straus, Giroux, 1999. 421 Endnotes 37. Barclay Trading Group, Ltd., Barclay Managed Futures Report, Vol. 4, No. 1 (First quarter 1993), 3. 38. Barclay Trading Group, Ltd., Barclay Managed Futures Report, Vol. 4, No. 1 (First quarter 1993), 10. 39. Presentation in Geneva, Switzerland on September 15, 1998

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investing strategy that tends to benefit from increasing volatility and/or persistent directional trends. Often associated with strategies employed by commodity trading advisors from the managed futures industry. 3. Penny stock: Loosely defined as stock with a low nominal share price that typically trades in the over-the-counter market, often an

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–806. Basso, Thomas F. When to Allocate to a CTA? Buy Them on Sale (1997). Basso, Thomas F. The Driving Force Behind Profits in the Managed Futures Industry. Trendstat Capital Management, Inc. (1998). Basso, Thomas F. Some Leverage Is Good, Too Much Is Dangerous. Trendstat Capital Management, Inc. (March 1999). Basso, Thomas

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and Options Research, University of Illinois, Champagne-Urbana (1997). Cavaletti, Carla. 1997’s Home Run Hitters. Futures, Vol. 27, No. 3 (March 1998). Chandler, Beverly. Managed Futures. England: John Wiley & Sons Inc., 1994. Chang, E.C. and B. Schachter. Interday Variations in Volume, Variance and Participation of Large Speculators. Working Paper, Commodity

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of Southern California (1993) Haun, Bruce. Rebalancing Portfolios Lowers Volatility and Stabilizes Returns. B. Edward Haun & Company (June 1994). Irwin, Scott H. and Satoko Yoshimaru. Managed Futures Trading and Futures Price Volatility (1996). Jaeger, Lars. Managing Risk in Alternative Investment Strategies. Upper Saddle River, NJ: Financial Times Prentice Hall, 2002 Jakiubzak, Ken

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into Traders. Managed Derivatives (May 1996). Karas, Robert. Looking Behind the Non-Correlation Argument. See www.aima.org/aimasite/research/lgtoct99.htm. Kat, Harry M. Managed Futures and Hedge Funds: A Match Made in Heaven. Working Paper (November 2002). Kaufman, Perry. Trading Systems and Methods, Third Edition. New York: John Wiley and

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., B. W. Brorsen, and S. H. Irwin. The Similarity of Computer Guided Technical Trading Systems. Journal of Futures Markets, 8 (1988): 1–13. Lungarella, Gildo. Managed Futures: A Real Alternative. White Paper. Mackay, Charles LL.D. Extraordinary Popular Delusions and the Madness of Crowds. New York, 1841. MacRae, Desmond. Dealing with Complexities

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: Convergent versus Divergent Trading. The Journal of Alternative Investments, Vol. 2, No. 1 (Winter 1999): 77–82. Schneeweis, Thomas, and Georgi Georgiev. The Benefits of Managed Futures. CISDM and School of Management at University of Massachusetts (2002). Schneeweis, Thomas, and Spurgin, Richard. Quantitative Analysis of Hedge Fund and

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Managed Futures Return and Risk Characteristics, in Evaluating and Implementing Hedge Fund Strategies, Second Edition, R. Lake ed., 2002. Schwager, Jack D. Getting Started in Technical Analysis.

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of Finance: Reading the Mind of the Market. New York: John Wiley & Sons, Inc., 1994. Spurgin, Richard. Some Thoughts on the Source of Return to Managed Futures. CISDM and School of Management at University of Massachusetts. Steinhardt, Michael. No Bull: My Life In and Out of Markets. Canada: John Wiley & Sons, Inc

The New Science of Asset Allocation: Risk Management in a Multi-Asset World

by Thomas Schneeweis, Garry B. Crowder and Hossein Kazemi · 8 Mar 2010 · 317pp · 106,130 words

110 111 117 119 120 120 122 126 132 Contents CHAPTER 7 Sources of Risk and Return in Alternative Investments Asset Class Performance Hedge Funds Managed Futures (Commodity Trading Advisors) Private Equity Real Estate Commodities Notes CHAPTER 8 Return and Risk Differences among Similar Asset Class Benchmarks Making Sense Out of Traditional

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ETFs exist that provide access to a wide range of investment sectors and risk/return scenarios. Tradable forms of private equity, real estate, hedge fund, managed futures, and commodity indices also exist. Moreover, the degree to which these new investment tools are offered and how they are presented to investors is often

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of individual investors. Financial regulation made it profitable for banks to offload certain trading processes, and new forms of external product based hedge funds and managed futures programs were developed. By the mid 1990s, globalization had led to the development of new forms of emerging market securities, new commodity products, as well

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of alternative investments, including traditional alternatives such as private equity, real estate, and commodities, as well as more modern alternatives such as hedge funds and managed futures. In the past 10 years, academics and practitioners have also come to appreciate that both traditional stocks and bonds as well as alternatives (real estate

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, commodities, private equity, hedge funds, and managed futures) have common risk factors that drive returns and that those risk factors are conditional on changing market conditions. Moreover, global and domestic regulatory forces as

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bonds and now includes a broader range of traditional alternatives (private equity, real estate, and commodities) along with new alternatives such as hedge funds and managed futures. In addition, the ability to provide a greater number of unique targeted products designed to meet investors’ needs has increased the asset allocation choices to

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equity, real estate (residential and commercial), and commodity investments.8 In recent years, an additional set of “modern alternative investments” such as hedge funds and managed futures have become increasingly available for both retail and institutional investors.9 For purposes of illustration, in this chapter we follow these three primary asset classes

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model that is workable from an organizational viewpoint. World Investment Opportunities Traditional Investments Modern Alternatives Traditional Alternatives Stocks Private Equity Hedge Funds Bonds Real Estate Managed Futures Commodities EXHIBIT 4.3 Traditional and Alternative Asset Class Breakdown 66 THE NEW SCIENCE OF ASSET ALLOCATION Primary Asset Classes ■ Traditional Assets ■ Equity Domestic Investment

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International Non Domestic Emerging Markets ■ Fixed Income Government Corporate Corporate High-Yield ■ Traditional Alternative Investments ■ Private Equity ■ Commodities ■ Real Estate ■ Modern Alternative Investments ■ Hedge Funds ■ Managed Futures (CTAs) The list of investment benchmarks used to represent the above asset classes is described in the glossary.10 In the following section, the benchmarks

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private equity); Commodities (S&P Goldman Sachs Commodity Index); Real Estate (FTSE NAREIT All REIT); Hedge Funds (CASAM/CISDM Equal Weight Hedge Fund Index); and Managed Futures (CASAM/CISDM CTA Equal Weight Index). HISTORICAL RETURN AND RISK ATTRIBUTES AND STRATEGY ALLOCATION In the following sections the return and risk performance of various

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EW Index Russell 2000 MSCI EAFE U.S. Currency Index Correlation 1991–2008 0.79 −0.17 portfolios). Finally, modern alternatives such hedge funds and managed futures both report moderate volatility as well as relatively low equity market betas. In Exhibit 4.5 the correlations between the various investment benchmarks are also

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private equity may not necessarily be regarded as an equity diversifier but more as a return enhancement to equity dominated portfolios. Lastly, hedge funds and managed futures both report moderate volatility as well as relatively low equity market betas. Over various periods of analysis and extreme market environments, there is evidence that

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benefits of a wide range of alternative investments, see www.ingarm.org. At this site a series of papers on the Benefits of Hedge Funds, Managed Futures, Private Equity, Real Estate, and Commodities exists that summarizes the return and risk benefits of a range of alternative investment classes. It should not go

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they may be regarded as being part of an overall equity sub-class rather than a separate asset class. In recent years hedge funds and managed futures have grown in investor interest. Both of these investment strategies have been shown to have low correlations with equity investments, fixed income investments, and traditional

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centered on traditional alternatives such as private equity, real estate, and commodities. For other investors, alternative investments also include various forms of hedge funds and managed futures (often classified as modern alternative investment vehicles). In previous years, most investors were required to find manager based alternative investment products that tracked the performance

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Index NAREIT S&P GSCI S&P PE ETF NAREIT ETF SP GSCI ETF Funds Funds Funds Individual Mgrs. Individual Mgrs. Individual Mgrs. Hedge Funds Managed Futures CISDM EW HF Index CISDM EW CTA Index Index Replication Index Replication Funds Funds Individual Mgrs. Individual Mgrs. Higher Transparency, Daily Price, Exchange Traded Lower

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travels a new road and focuses on major forms of alternative investments, their source of returns, and their recent performance. Alternative investments include hedge funds, managed futures, private equity, real estate, and commodities.1 In this chapter a working definition for each is provided. For a range of alternative investments, the historical

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private equity may not necessarily be regarded as an equity diversifier but more as a return enhancement to equity dominated portfolios). Finally, hedge funds and managed futures both report moderate volatility as well as relatively low equity market betas. In Exhibit 7.2, the correlations across the various investment asset groupings are

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) the market factor sensitivity, and (4) the performance in down and up equity markets for each of five major alternative investments that is: hedge funds, managed futures, private equity, real estate, and commodities. Results are presented both at the composite index level as well as, when available, the strategy index level. HEDGE

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&P 500 months as well as the highest positive returns in the months in which the S&P 500 had its best performance. MANAGED FUTURES (COMMODITY TRADING ADVISORS) The term “managed futures” represents an industry composed of professional money managers known as commodity trading advisors (CTAs) or commodity pool operators (CPOs). Commodity trading advisors

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or commodity pool operators manage client assets on a discretionary basis, using forwards, futures, and options markets as the primary investment area. Managed futures, through their ability to take both long and short investment positions in international financial and non-financial asset sectors, offer risk and return patterns not

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investments (e.g., hedge funds, real estate, private equity, or commodities). Investors generally invest in CTAs using individual managed accounts. Investors can also access the managed futures industry by investing through a commodity pool that resembles a mutual fund. Investments from several investors are pooled together and then invested in futures either

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/Short CISDM Event Driven Multi-Strategy CISDM Fixed Income Arbitrage Best 32 Months 146 THE NEW SCIENCE OF ASSET ALLOCATION Sources of Managed Futures Return The sources of return to managed futures are uniquely different from traditional stocks, bonds, or even hedge funds. For instance, futures and options contracts can provide direct exposure to

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addition, options traders may also directly trade market/security characteristics, such as price volatility, that underlie the contract. As for hedge funds, the sources of managed futures returns have also been described as being based on the unique skill or strategy of the trader. Because CTAs actively trade, manager skill is important

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. Many managed futures strategies trade primarily in futures markets, which are zero-sum games. If CTAs were only trading against other CTAs, then it may be concluded that

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an individual managed futures program’s returns are based solely on manager skill. However some spot market players are willing to sell or hedge positions even if they expect

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interest rate futures may trend over time due to government policy to smooth price movements). Since academic research (Schneeweis et al., 1998), has demonstrated that managed futures returns may be driven by systematic market factors such as changes in interest rates, exchange rates, or market volatility, rather than exclusively by an individual

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measured relative to an index of other active managers, then the relative performance simply measures the over- or underperformance to that index of manager returns. Managed Futures Return and Risk Performance Exhibit 7.9 shows the risk and return performance of CTAs, traditional U.S. stocks and bonds, hedge funds, real estate

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and alternative investments for the most recent eight year period 2001 to 2008 are also reviewed in Exhibit 7.10. Over the period of analysis, managed futures reported a higher annualized return and lower volatility than the S&P 500. Compared to the returns of the Barclays Capital U.S. Aggregate Bond

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, results in Exhibit 7.12 also show a low correlation between the CTA systematic index and the CTA discretionary index reflecting the differential trading styles. Managed Futures Performance in Down and Up Equity Markets Exhibit 7.13 depicts the performance over various CTA strategies in months in which the S&P 500

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performance may not reflect the performance of an individual manager or security. This is especially true in areas of investment such as hedge funds and managed futures where discretion may play a larger role in the investment 190 8.29% 8.75% 7.54% 6.44% 5.56% 5.35% 6.71

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); survival bias (managers who leave, generally due to poor performance, leave the database and the index is recalculated). Most indices, including most hedge fund and managed futures indices, are not recalculated when current managers leave or new managers enter (begin reporting to the data base) In brief, individuals should be aware of

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as changes in credit spreads or market volatility, rather than exclusively by an individual manager’s alpha. Therefore, one can think of hedge fund and managed futures returns as a combination of manager skill and an underlying return to the hedge fund strategy or investment style itself. Similar to the equity and

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bond markets, passive investable security based indices have been created that are designed to capture the underlying return to the hedge fund and managed futures strategy (Amenc et al., 2008; Jaeger and Wagner, 2005).2 The performance of an individual manager can be measured relative Myths of Asset Allocation 221

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to that “strategy” return. If a manager’s performance is measured relative to the passive algorithmic based hedge fund/managed futures index/benchmark, then the differential return may be viewed as the manager’s “alpha” (return in excess of a similar non-manager based replicate portfolio

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to change or revise heartfelt views that may have once proved useful but no longer fit reality. NOTES 1. For additional commentary on Myths of Managed Futures and Myths of Hedge Funds, see Frequently Asked Questions (INGARM, 2009). 2. These security based indices are available in tradable form from various platform providers

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): 341–360. Sabal, J. “The Determinants of Housing Prices: The Case of Spain.” (2005). Available at www.sabalonline.com. Schneeweis, T. “Dealing with Myths of Managed Futures.” The Journal of Alternative Investments 1, No. 1 (Summer 1998): 9–17. Schneeweis, T. “Dealing with Myths of Hedge Fund Investments.” The Journal of Alternative

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a Passive Futures-Based Index.” CISDM Working Paper, 2000. Schneeweis, T., R. Spurgin, and H. Kazemi. “Eurex Derivative Products in Alternative Investments: The Case for Managed Futures.” Eurex, June 2003. Schwarz, E., J. Hill, and T. Schneeweis. Financial Futures: Fundamentals, Strategies, and Applications. Homewood, IL: Irwin, 1986. Sewell, Martin. “Behavioural Finance.” University

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co-founder of Alternative Investment Analytics (a commodity investment firm that helped create the Bache Commodity Index) and of White Bear Partners (a hedge fund/managed futures trading firm). He was also associated with the creation and development of the Zurich and Dow Jones Investable Hedge Fund Indices. He has acted as

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, 122, 156, 214–215 Dow Jones-UBS Commodity Index (DJ-UBS), 182 Down markets, 134 and commodity performance, 163 and hedge fund performance, 143 and managed futures performance, 148 and private equity performance, 153 and real estate performance, 158–160 Due diligence, 232–235 Dynamic asset management, 2, 107–108 Dynamic portfolio

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factor models, 124 Linear regression, 7, 40, 198 Liquidity, 62, 64, 98, 122, 127 Liquidity risk, 197 Long collar, 208–210 Madoff, Bernard, 233–235 Managed futures, 65, 68, 143–148 Managers. See Investment managers Marginal risk, 17 Market: efficiency, 85 risk, 7, 65, 196 risk analysis, 34 segment, 70–71, 82

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, 162–163 differences among similar asset class benchmarks, 167–194 hedge funds, 140–143 historical attributes and strategy allocation, 66–70 historical comparisons, 71–74 managed futures, 146–148 models post-1980, 11–13 multi-factor estimation, 50–54 performance results, 66 predictability of, 95–96 private equity, 151–153 real estate

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models, 50–54 Return generating models, 46 Return intervals, 36 Returns: benchmark, 136 CISDM hedge funds, 145 commodities, 160–162 hedge funds, 139–140 and managed futures, 146 and performance of investment managers, 215 real estate, 155–156 Return to risk, 2, 18, 19 Return volatility, 61, 99 Risk, 1–2 absolute

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, 28 UBS Bloomberg Constant Maturity Commodity Index (CMCI), 182 Uncertainty, 2, 214 Up equity markets: and commodity performance, 163 and hedge fund performance, 143 and managed futures performance, 148 and private equity performance, 153 and real estate performance, 158–160 Up minus down (UMD) factor, 45 Value at risk (VaR), 34–36

A Demon of Our Own Design: Markets, Hedge Funds, and the Perils of Financial Innovation

by Richard Bookstaber · 5 Apr 2007 · 289pp · 113,211 words

of equity market neutral, fixed income arbitrage, and convertible arbitrage; event-driven has merger arbitrage, distressed, and special situations; directional/tactical has long/short equity, managed futures, and macro. The problem with this sort of classification, based as it is strictly on the trading style or strategy type, is that it has

Mathematics of the Financial Markets: Financial Instruments and Derivatives Modelling, Valuation and Risk Issues

by Alain Ruttiens · 24 Apr 2013 · 447pp · 104,258 words

–Shapiro method government bonds Greece Greeks see sensitivities Hard Call protection Heath, Jarrow and Morton (HJM) model Heaviside function hedging bond futures delta-gamma neutral management futures 129–30 immunization vs hedging money market rate futures stock index futures heteroskedasticity hidden layers, NNs high frequency trading “high” prices historical method, VaR historical

Efficiently Inefficient: How Smart Money Invests and Market Prices Are Determined

by Lasse Heje Pedersen · 12 Apr 2015 · 504pp · 139,137 words

: The Returns to the Major Asset Classes 167 Chapter 11 Global Macro Investing 184 Interview with George Soros of Soros Fund Management 204 Chapter 12 Managed Futures: Trend-Following Investing 208 Interview with David Harding of Winton Capital Management 225 Part IV Arbitrage Strategies 231 Chapter 13 Introduction to Arbitrage Pricing and

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Investing: George Soros: Betting on the macro developments in global bond, currency, credit, and equity markets. The macro philosopher who “broke the Bank of England.” Managed Futures Strategies: David Harding: Trend-following trades across global futures and forwards. Devised a systematic trend-detection system. Fixed-Income Arbitrage: Myron Scholes: Relative value trades

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and helped develop new funds with elements of all the eight strategies discussed in this book, long–short equities, short-selling, quantitative equities, global macro, managed futures, fixed-income arbitrage, convertible bond arbitrage, and event-driven investment. As I love the combination of theory and practice, I decided to straddle both worlds

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investing in another currency with a higher interest rate, but it is exposed to the risk that the relative values of the currencies can change. Managed futures investors (also called commodity trading advisors, CTAs) trade many of the same securities as global macro traders: bond futures, equity index futures, currency forwards, and

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commodity futures. Managed futures investors often focus on finding price trends, buying instruments that are trending up, and shorting instruments that are trending down. For instance, if gold prices

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general tendency of initial underreaction and delayed overreaction that creates trends and momentum, as discussed further in chapters 9 and 12, on quantitative equity and managed futures. Why do these effects arise? One explanation is that some investors (“noise traders”) suffer from behavioral biases and make common mistakes that push prices away

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discussed more in chapter 11, which also considers how central banks, the macro economy, and other factors affect global asset markets. Chapter 12 then describes managed futures investing, which is focused on trend-following strategies. 10.1. STRATEGIC ASSET ALLOCATION Large institutional investors often first decide on their long-run strategic asset

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remain cheaper in a poorer country even if iPad prices converge. 5 Soros (2010), “Financial Markets,” in The Soros Lectures, PublicAffairs, New York. CHAPTER 12 Managed Futures Trend-Following Investing Cut short your losses … and let your profits run on. —David Ricardo (1772–1823) … big money was not in the individual fluctuations

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Livermore, and trends continue to play an important role for active investors. The traders who are most directly focused on trend-following investing are the managed futures hedge funds and commodity trading advisors (CTAs). Such funds have existed at least since Richard Donchian started his fund in 1949, and they have proliferated

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tradable contracts. BarclayHedge estimates that the CTA industry has grown, managing approximately $320 billion as of the end of the first quarter of 2012.2 Managed futures returns can be largely understood by simple, implementable trend-following strategies—specifically time series momentum strategies. This chapter provides a detailed analysis of the economics

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as markets begin to decline and thus profits as markets continue to fall. Time series momentum strategies help explain returns to the managed futures universe. Like time series momentum, some managed futures funds have realized low correlation to traditional asset classes, performed best in extreme up and down stocks markets, and delivered alpha relative

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to traditional asset classes. When we regress managed futures indices and manager returns on time series momentum returns, we find large R-squares and very significant loadings on time series momentum at each trend

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horizon and in each asset class. In addition to explaining the time variation of managed futures returns, time series momentum also explains the average excess return. Indeed, controlling for time series momentum drives the alphas of most managers and indices below

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. the S&P 500, 1985–2012. Source: Hurst, Ooi, and Pedersen (2013). 12.5. TIME SERIES MOMENTUM EXPLAINS ACTUAL MANAGED FUTURES FUND RETURNS We collect the returns of two major managed futures indices, BTOP 50 and DJCS Managed Futures Index,7 as well as individual fund returns from the Lipper/Tass database in the category labeled

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than our hypothetical strategy. TABLE 12.2. UNDERSTANDING THE PERFORMANCE OF MANAGED FUTURES Panel A. Performance of Managed Futures Indices and Top Funds Panel B. Time Series Momentum Explains Managed Futures Returns Notes: Panel A shows the performance of managed futures indices and the five largest managed futures managers in the Lipper/Tass database as of June 2012. All numbers

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intercept from a regression on the MCSI World stock index, Barclays Bond Index, and the GSCI commodities index. Panel B shows the multivariate regression of managed futures indices and managers on time series momentum returns by trend horizon. T-statistics are reported in parentheses. The bottom row reports the percentage of all

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to those of the indices and managers, we want to show that time series momentum can explain the strong performance of managed futures managers. To explain managed futures returns, we regress the returns of managed futures indices and managers on the returns of 1-month, 3-month, and 12-month time series momentum: Panel B of

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sense that the R-squares of these regressions are large, ranging between 0.46 and 0.64. The table also reports the correlation of the managed futures indices and managers with the diversified TSMOM strategy. These correlations are large, ranging from 0.66 to 0.78, which provides another indication that time

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series momentum can explain the managed futures universe. The intercepts reported indicate the excess returns (or alphas) after controlling for time series momentum. While the alphas relative to the traditional asset classes

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of the managers), time series momentum nevertheless drives these alphas to be negative. This is another expression in which time series momentum can explain the managed futures space and is an illustration of the importance of fees and transaction costs. Another interesting finding that arises from Panel B is the relative importance

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of short-, medium-, and long-term trends for managed futures funds. In summary, while many managed futures funds pursue many other types of strategies besides time series momentum, our results show that time series momentum explains the average alpha in

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short- and medium-term strategies as these signals change more quickly, leading to a larger alpha decay. As mentioned, the annual transaction costs of a managed futures strategy are typically about 1 to 4% for a sophisticated trader, possibly much higher for less sophisticated traders, and higher historically given higher transaction costs

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transaction costs of the 1-month, 3-month, 12-month, and diversified time series momentum strategies as a function of the rebalancing frequency. To implement managed futures strategies, managers must post margin to counterparties, namely the futures commission merchant and the currency intermediation agent (or currency prime broker). The time series momentum

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each security by scaling down the position when risk spikes up. Furthermore, it achieves a risk-balanced diversification across securities at all times. Lastly, some managed futures managers use drawdown control, further seek to identify overextended trends to limit the losses from sharp trend reversals, and try to identify short-term countertrends

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HARDING OF WINTON CAPITAL MANAGEMENT David W. Harding is the chairman and chief executive officer of Winton Capital Management, a global investment manager focusing on managed futures investments. Before founding Winton Capital, Harding co-founded Adam Harding and Lueck (AHL) in 1987, one of the first systematic trend-following CTAs in Europe

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and spread, and fevers develop and people get over-optimistic and become disappointed. LHP: Are there some circumstances or events that illustrate the value of managed futures? DWH: We tend to make money out of surprises, and people are very bad at foreseeing surprises. If you just look at the history of

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spectrum of possible fundamental values, and trend following probably moves prices around within the range of possible values. LHP: Do you think that having more managed futures investors will tend to eliminate trends, or make trends stronger? DWH: I can only give you an unsatisfactory answer, which is I think it’d

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probably change the autocorrelation spectrum of price data. In other words, it will change the nature of trends, somewhat. LHP: Some people say that managed futures have tail-hedging properties. Do you agree? DWH: I’m relatively uncomfortable with that concept. Over the last 20 years commodity trading advisors have tended

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Grant (1838), and the quote attributed to Livermore is from Lefèvre (1923). 2 This chapter is based closely on Hurst, Ooi, and Pedersen (2013), “Demystifying Managed Futures,” Journal of Investment Management 11(3), 42–58. I thank my co-authors Brian Hurst and Yao Hua Ooi for their collaboration. The time series

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prices in the market. Intermediaries use equilibrium models to determine prices at which to intermediate. LHP: Then there is curve trading. MS: Well, suppose that managed futures funds or macro traders such as George Soros believe that, say, bond prices in Japan are going to go up or yields are going to

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Guide to the Theory, Tools, and Trades, John Wiley & Sons, West Sussex, U.K. Hurst, Brian, Yao Hua Ooi, and Lasse Heje Pedersen (2013), “Demystifying Managed Futures,” Journal of Investment Management 11(3), 42–58. Hurst, Brian, Yao Hua Ooi, and Lasse Heje Pedersen (2014), “A Century of Evidence on Trend-Following

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), 208; Adam Harding and Lueck as, 225; diversification from investing with, 228; fees of, 223; tail hedging and, 228; trading rules of, 48. See also managed futures investing commodity value trade, 197–98, 198f computer models. See quantitative equity investing confirmation bias, 212 conglomerate boom of late 1960s, 201–2, 203 constant

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, 264, 266, 267; Soros on, 201, 203 feedback trading, extending a trend, 211–12 feeder fund, 24, 25f fees of hedge funds, 21–22, 38; managed futures, 223 financial crises. See global financial crisis of 2007–2009; liquidity crises financing for hedge funds. See “funding” entries; leverage financing spread, 78–79 fire

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and, 261; statistical arbitrage involving, 153; in time series momentum strategies, 213, 214, 214–17f, 218t. See also bond futures; commodity futures; equity index futures; managed futures investing futures commission merchants (FCMs), 26, 80, 225 gain-on-sale accounting, 124–25 gambler’s ruin, 80–81 gamma, 277, 279 GARP (growth at

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macroeconomics, 191–96, 191t, 195t macro strategies, 8, 11–13; asset allocation for, 167–68. See also global macro investing; managed futures investing MADD (maximum acceptable drawdown), 60–61 managed futures indices, 221, 222t, 223 managed futures investing, viii, 11, 12–13, 208–10; explaining the returns of, 221, 222t, 223; implementation of, 224–25; Scholes

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on, 264–65; surprises and, 227–28. See also commodity trading advisors (CTAs); Harding, David W.; time series momentum strategies; trend-following investing managed futures quants, 13 management company, 25, 25f management departures, 127, 128 management fee, 21, 38 management quality, 102, 104; Ainslie on, 108, 110, 112, 113 Man

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arbitrage trading, 233; in convertible bond trading, 281, 284; defined, 77; on hedge fund balance sheet, 75–76, 76f; liquidity spiral and, 82, 148; in managed futures strategies, 225; in options trading, 238; for short seller, 116, 118; for swaps, 259; for time series momentum strategy, 225. See also collateral Market Break

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real estate investment trusts (REITs), 261 realized average return, 32 realized cost, 67, 68 reallocation. See tactical asset allocation rebalancing of portfolio, 169–70; in managed futures strategy, 224, 224f, 225; in time series momentum strategy, 213; trading against trends, 211. See also portfolio rebalance rule rebate rate, 79, 117 recall risk

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strategy and, 27–28 risk limits, 59–60 risk management, 54; drawdown control in, 54, 59, 60–62, 225; in line with trends, 212; in managed futures investing, 225; versus predatory trading, 84; prospective, 59–60; trader’s emotions and, 61 risk neutral probability, 238 risk parity investing, 16, 45, 171 risk

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, 188t; of global value and momentum trades, 198, 198f; of high-minus-low (HML) factor, 137; in low-risk investing, 141, 142, 142f, 143f; of managed futures funds and indices, 221, 222t; market timing strategy and, 175; of merger arbitrage, 305; portfolio risk and, 171; rebalancing a portfolio according to, 48; of

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; margin requirements for, 225; position sizing in, 213, 213n, 214, 219–20, 225; single-assets example (1985 to 2012), 212–14, 214–17f. See also managed futures investing time series momentum strategies, diversified: example of (1985 to 2012), 214, 218–19, 218t; explanation of returns from, 219–21, 220f; hypothetical fee for

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, 223, 224; managed futures fund returns and, 221, 222t, 223; versus S&P 500, 219, 219f, 220, 220f time series regression, 51–52, 53 TIPS (Treasury inflation-protected securities

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; of arbitrage trades, 235; Asness on, 160, 163; estimating expected values of, 69–70; implementation shortfall and, 70–72; liquidity of securities and, 63; of managed futures strategies, 224–25; market liquidity risk and, 42–45, 63; as market makers’ profit, 154; measuring, 67–69; optimal trading in light of, 64–67

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underreaction/delayed overreaction and, ix, 41, 209, 210–12, 210f; rationale underlying, 210–12, 210f; Scholes on, 266, 267. See also commodity trading advisors (CTAs); managed futures investing; time series momentum strategies t-statistic: of alpha estimate, 28–29; of alpha for time series momentum strategies, 218t, 219; security selection strategy and

Expected Returns: An Investor's Guide to Harvesting Market Rewards

by Antti Ilmanen · 4 Apr 2011 · 1,088pp · 228,743 words

settlements, longevity swaps, and others. If hedge funds can be characterized as an asset class, then the list of alternatives may be extended to include managed futures (typically momentum-oriented commodity-trading advisors or CTAs), global tactical asset allocation managers (typically value-oriented investors), active FX, volatility trading, alternative betas and hedge

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and backfill biases, few studies are able to quantify selection, liquidation, lookback, and lookahead biases. Box 11.4. CTA performance Commodity trading advisors (CTAs) or managed futures may be viewed either as a subset of HFs or as a distinct but close cousin. Unlike most HFs, CTAs tend to be systematic and

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. During financial crises such as 1998 and 2008, these strategies were among the few solid performers. Many empirical studies show that momentum strategies and CTAs (managed futures funds that focus on trend following) have negative or low correlations with equity markets and with value, carry, and reversal strategies. These other strategies tend

Hedge Fund Market Wizards

by Jack D. Schwager · 24 Apr 2012 · 272pp · 19,172 words

moderate drawdowns. Return alone is a highly inadequate metric for a futures manager because it is so dependent on the exposure level chosen by the manager. Futures managers always use only a fraction of assets under management to meet margin requirements. Therefore, any futures manager can double returns by simply doubling exposure

The Missing Billionaires: A Guide to Better Financial Decisions

by Victor Haghani and James White · 27 Aug 2023 · 314pp · 122,534 words

provide diversification benefits, but many alternatives, such as private equity and venture capital, are still basically equity investments. Some strategies, such as macro‐funds and managed futures funds, have a stronger claim of having a low correlation with the overall performance of capital markets, but that should not be expected from the