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Managed Futures for Institutional Investors. Analysis and Portfolio Construction. Edition No. 1. Bloomberg Financial

  • ID: 2216547
  • Book
  • May 2011
  • 368 Pages
  • John Wiley and Sons Ltd
A practical guide to institutional investing success

Managed Futures for Institutional Investors is an essential guide that walks you through the important questions that need to be addressed before investing in this asset class and contains helpful direction for investors during the investing process.

Backed by years of institutional experience, the authors reveal the opportunities offered by managed futures. They also include information on practices in the managed futures area and present the various analytical tools and building blocks required to use managed futures effectively. The book also contains insight on the issues that must be addressed when building and evaluating portfolios.

  • Shows where to find data to evaluate managed futures and explains how managed futures are regulated
  • Offers guidance on how to apply classic portfolio construction tools to managed futures
  • Reveals how managed futures investments can help investors evaluate and meet risk, return, and liquidity objectives

Managed Futures for Institutional Investors provides all the practical information to manage this type of investment well.

Note: Product cover images may vary from those shown

Acknowledgments xiii

Introduction: Why Invest in CTAs? 1

What Kind of Hedge Fund Is a CTA? 1

Why Do CTAs Make Money? 2

How Much Should You Invest? 7

What About the Risks? 9

They’re a Good Fit for Institutional Investors 10

How the Book Is Structured 11

Part I: A Practical Guide to the Industry

Chapter 1 Understanding Returns 17

Risk and Cash Management 18

Trading, Funding, and Notional Levels 19

The Stability of Return Volatilities 19

Basic Futures Mechanics 20

A Typical Futures Portfolio 27

Chapter 2 Where Are the Data? 41

The CTA Universe and Your Range of Choices 42

The Fluid Composition of a Database 44

How Backfilled Data Can Mislead 46

Trading Programs and Lengths of Track Records 48

Returns Net of Fees and Share Classes 49

Sources of Data for Indexes of CTA Performance 50

Chapter 3 Structuring Your Investment: Frequently Asked Questions 53

How Many Managers Should You Choose? 55

What Are CTA Funds? 58

What Are Multi-CTA Funds? 60

What Are Managed Accounts? 62

What Are Platforms? 66

How Do You Compare and Contrast These Offerings? 66

Who Regulates CTAs? 68

How Are Structured Notes and Total Return Swaps Used by CTA Investors? 69

What Are the Account Opening Procedures for a Managed Account? 69

What Is the Minimum Investment in a CTA? 71

What Does It Mean When a Manager Is Closed? 71

What Are the Subscription Procedures for a Fund? 71

Conclusion 72

Part II: Building Blocks

Chapter 4 How Trend Following Works 75

The Two Basic Strategies 76

Making the Systems Work in Practice 79

Transactions Costs 87

Other Considerations 87

Case Study: Two Models from 1994–2003 89

Rates of Return and Leverage 94

Commodities and Capacity Constraints 94

Market Environment and Give-Backs 97

Chapter 5 Two Benchmarks for Momentum Trading 99

Data and the Trend-Following Sub-Index 101

Trend-Following Models 108

Laying the Groundwork for Analyzing Returns to Trend Following 108

Constructing a Portfolio 110

Simplifying Assumptions 114

How Did the Models Do? 115

The Newedge Trend Indicator 124

Next Steps 124

Chapter 6 The Value of Daily Return Data 129

How Good Are Daily Data? 130

Estimating Return Volatility 138

Distributions of Estimated Volatility 139

Beware a False Sense of Confidence 145

What If Underlying Returns Are Highly Skewed? 146

Effect on Drawdown Distributions 148

Chapter 7 Every Drought Ends in a Rainstorm: Mean Reversion, Momentum, or Serial Independence? 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 181

Drawdown Defined 182

What Should They Look Like? 183

What Forces Shape the Distributions? 184

The Distribution of All Drawdowns 185

The Distribution of Maximum Drawdowns 187

The Core Drawdown Function 190

Empirical Drawdown Distributions 192

Reconciling Theoretical and Empirical Distributions 192

Putting a Manager’s Experience in Perspective 197

What about Future Drawdowns? 198

Further Questions 199

Chapter 9 How Stock Price Volatility Affects Returns 201

A Look at Historical Returns 202

Stock Price Volatility and Returns on the S&P 500 203

S&P 500 Volatility Dominates Market Volatility 206

CTA Returns, Correlations, and Volatility 210

Conclusion 215

Chapter 10 The Costs of Active Management 217

Forgone Loss Carry-Forward 217

Liquidation and Reinvestment 220

Other Costs 224

Conclusion 225

Chapter 11 Measuring Market Impact and Liquidity 227

A Very Fat Data Set 229

A Representative Market Maker 234

Fitting the Curve to the Data 237

Hidden Liquidity 238

Estimating the Risk-Aversion Parameter 243

Volume, Volatility, and Market Impact Profiles 243

Where Do We Go from Here? 246

Appendix 247

Part III: Portfolio Construction

Chapter 12 Superstars versus Teamwork 253

The Contribution of Low Correlation to Portfolio Performance 255

How Reliable Are Correlation Estimates? 256

The Contest 262

Dropping and Adding Managers 270

The Value of Incremental Knowledge about Return Distributions 275

The Costs of Dropping and Adding Managers 277

Chapter 13 A New Look at Constructing Teamwork Portfolios 279

Why Look Back? 281

A Fresh Look at the Original Research 282

Two New Approaches 287

Comparing the Four Approaches 291

Reviewing the Results 296

Chapter 14 Correlations and Holding Periods: The Research Basis  for the Newedge AlternativeEdge Short-Term Traders Index 297

Review of Previous Research 298

Index Methodology and Construction 304

How Low Are the Correlations? 305

Why Are the Correlations Low? 308

Holding Period and Return Correlation 308

Why Are There Not More Short-Term Traders? 313

Replicating the Index 314

Cautions and Managing the Index 316

Conclusion 316

Appendix 316

Chapter 15 “There Are Known Unknowns”: The Drag of Imperfect Estimates 319

Improving Risk-Adjusted Returns 321

Throwing Out the Losers 331

Due Diligence and Evaluation 338

Bibliography 341

About the Authors 343

Index 345

Note: Product cover images may vary from those shown
Galen Burghardt
Brian Walls
Note: Product cover images may vary from those shown