• Definition: Managed Futures/CTAs
  • Performance/Correlation
• Background Color
  • Father of Trend-Following
  • The Amazing Experiment
• Managed Futures Indices
• Trend-Following vs Momentum
• CAIA – Trends on Known-Factors
• Global Systematic Futures Model
• Trend-Following on Equities
• HWK#2 Assigned

Managed Futures refer to investments that are offered by professional money managers known as “Commodity Trading Advisers” (CTAs). CTAs are required to register with the CFTC through the NFA prior to providing public money management services.

CTAs may employ both discretionary and systematic trading styles across liquid futures markets, such as equities, gov’t bonds, softs, metals, grains, and fx. Trend and counter-trend strategies are typically employed across this industry.

Historically, CTAs have, on average, generated returns that have low correlation to typical hedge fund strategies. Managed futures are characterized as having higher capacity and slightly higher volatilities compared to other hedge fund strategies.

Diversification benefits exist when included with almost all other hedge fund strategies, so why are they not even more popular as investment vehicles?

• The ugly step-child of the modern day hedge fund, fights for legitimacy
• Longer history of money management, but less credentials
• Much more advanced and established as respectable industry in London/Europe
• More (pit) trader mentality, especially managers who cut their teeth in Chi-town
• However, convergence towards institutionalization has been pervasive

- Beware of acting immediately on a widespread public opinion. Even if correct, it will usually delay the move.
- From a period of dullness and inactivity, watch for and prepare to follow a move in the direction in which volume increases.
- LIMIT LOSSES and ride profits, irrespective of all other rules.
- Light commitments are advisable when market position is not certain. Clearly defined moves are signaled frequently enough to make life interesting and concentration on these moves will prevent unprofitable “whip-sawing.”
- Seldom take a position in the direction of an immediately preceding three-day move. Wait for a one-day reversal.

• Judicious use of stop orders is a valuable aid to profitable trading. Stops may be used to protect profits, to limit losses and to take positions from certain formations such as triangular foci. Stop orders are apt to be more valuable and less treacherous if used in proper relation to the chart information.
  
• In a market in which upswings are likely to equal or exceed downswings, heavier position should be taken for the upswings for percentage reasons – a decline from 50 to 25 will net only 50% profit, whereas an advance from 25 to 50 will net 100%.

• In taking a position, price orders are allowable. In closing a position, use market orders.
  
• Buy strong-acting, strong-background commodities and sell weak ones, subject to all other rules.
  
• Moves in which rails (transportation) lead or participate strongly are usually more worth following than moves in which rails lag.

## More, Managed Futures / CTAs ## More, Managed Futures / CTAs

CTAs AUM Growth
Futures/CTAs Indices

This industry will only continue to grow, but why?

Compare BTOP50 with S&P500 yearly returns from 1987 to 2011

Compare BTOP50 with S&P500 yearly returns from 1987 to 2011

“In an important study Narasim Jegadeesh and Sheridan Titman (1993) document the existence of a momentum effect. Jegadeesh and Titman attribute this effect to the fact that investors under-react to the release of firm-specific information, a cognitive bias.”
Behavioural Finance
Momentum

“Value and Momentum Everywhere”
Asness, Moskowitz, and Pedersen
Time Period: 01/1974-10/2008

Journal

Constructing A Simple Momentum Strategy

• Quantitatively driven trading model that attempts to capitalize on the predictable movements within liquid global futures markets based on technical indicators
  
• The model identifies markets that have inherent momentum based on proprietary transformation of inputs with the key component of identifying entry and exit points to period of “valued-momentum”
  
• Model consists of a blend of scientific-rigor and artistic-experience
  
• Future markets traded include but limited to: (1) Stocks Indices, (2) Fixed Income (both Bonds and Short-term Rates), (3) Currencies, (4) Energies, (5) Metals (both Precious and Industrial); (6) Agricultural (both Grains/Oil Seeds and Softs); and (7) Livestock

• Database: 1983 to 2004
• Corporate actions properly back adjusted, cash/stock dividends, delisted, mergers,
• spin-offs, reverse splits/splits, etc.
• Filter out penny stocks and filter for minimum daily liquidity

• Entry – All-time highest close – “if today’s close is greater than or equal to the highest close during the stock’s entire history then buy tomorrow on the open”

• Exit, function of Average True Range
• Define “True Range”

\[TR = max(High - Low,|High - Close_{-1}|,|Close_{-1}-Low|)\]

The true range is the largest of the: - Most recent period’s high minus the most recent period’s low - Absolute value of the most recent period’s high minus the previous close - Absolute value of the most recent period’s low minus the previous close

• Exit, function of Average True Range
• Average True Range \[ATR = \frac{1}{T} \Sigma^{T}_{i=1}TR_{i}\] { width=35% ,center}

• Q1: Are All Hedge Fund Strategies Created Equal?
• Q2: Should Investors Just Buy the “HF Index”?
• Q3: Is there a correlation factor that can help explain HF returns?
• Hedge Fund Managers’ Video Interviews

are hedge fundsfor suckers?

Consider:

Hedge Fund Manager A with a Sharpe Ratio of 2.0 vs Hedge Fund Manager B with a Sharpe Ratio of 1.5

Which one should we invest in?

• Are we measuring risk/return correctly?
• How liquid are the underlying investments? Does it matter?
• What are the hidden risks associated with less-liquid or illiquid securities/investing?
• Can we quantify it?
• Unstable relationships, how unstable?
• How do we even begin?

• Yes, hedge funds can provide significant diversification for traditional portfolios
  
• Examine, empirically, hedge fund indices CSFB/Tremont 1994-2000 (monthly data)
  
• Simple regression shows modest market exposure and positive value added
  But, this is very misleading…….
• Since some HFs have illiquid securities and difficult to price OTC securities
• Positive serial correlation exists due to “stale” or “managed” prices
• Once lagged betas are employed, find that hedge funds do not add value over this period
  “Do Hedge Funds Hedge?” by Asness et al

• Weisman (2000) argues that hedge funds manage their reported monthly returns – “marketing supportive accounting”
• Stale prices can lower estimates of volatility and correlation to traditional indices
• Likely, Scholes and Williams (1977) and Dimson(1979) have techniques to account for illiquid securities
• Show that employing monthly returns to estimate betas and correlations understate market exposure
• Note study only hedge fund indices not individual hedge funds

• Data CSFB/Tremont (now DJ CS HF indices, employed in HWK1)
  
• Data bias – Survivorship, Backfill, and Self-selection
  
  

Notice that monthly versus quarterly estimates of annualized standard deviation differ.

Notice that monthly versus quarterly estimates of annualized standard deviation differ.

** to be continued **