Managed Futures for Institutional Investors Analysis and Portfolio Construction

by Burghardt, Galen; Walls, Brian

• ISBN13: 9781576603741
• ISBN10: 1576603741
• Edition: 1st
• Format: Hardcover
• Copyright: 2011-05-03
• Publisher: Bloomberg Press

Summary

Managed Futures for Institutional Investors will guide investors through all the important questions that need to be addressed before and while investing in this asset class. This is the essential reference guide for institutional investors interested in exploring the opportunities offered by managed futures. The book is divided into three parts. Part I is a guide to business practices in the managed futures area; part II presents the various analytical tools and building blocks required to use managed futures effectively; part III covers the important questions and issues that must be addressed in the building and evaluation of portfolios. The authors cover such issues as where to find data to evaluate managed futures, how managed futures are regulated, how to apply classic portfolio construction tools to managed futures, and how managed futures investments can help them think about and meet risk, return, and liquidity objectives. The book provides all the practical information to manage those investments well.

Author Biography

Galen Burghardt is Director of Research for Newedge USA, LLC, a joint venture between Calyon and Société Générale. He is the lead author of The Treasury Bond Basis and The Eurodollar Futures and Options Handbook, which are standard texts for users of financial futures. He was an adjunct professor offinance in the University of Chicago's Graduate Schoolof Business (now the Booth School). He was the headof financial research for the Chicago Mercantile Exchange, and gained access to the world of futures through his work in the Capital Markets Section of the Federal Reserve Board. His PhD in economics is from the University of Washington in Seattle.

Brian Walls is the Global Head of Research at Newedge Prime Brokerage, the foremost provider of brokerage services to the managed futures industry. ¿He has worked in the financial services industry for thirty years in the various capacities of trading, operations, management, and research. ¿He was a pioneer of capital introduction services and is a sought after and trusted advisor to many Commodity Trading Advisors, global macro managers, fund of funds and institutional investors. He is the chairman of the Newedge Index Committee.

Table of Contents

Acknowledgments	p. xiii
Introduction: Why Invest in CTAs?	p. 1
What Kind of Hedge Fund Is a CTA?	p. 1
Why Do CTAs Make Money?	p. 2
How Much Should You Invest?	p. 7
What About the Risks?	p. 9
They're a Good Fit for Institutional Investors	p. 10
How the Book Is Structured	p. 11
A Practical Guide to the Industry
Understanding Returns	p. 17
Risk and Cash Management	p. 18
Trading, Funding, and Notional Levels	p. 19
The Stability of Return Volatilities	p. 19
Basic Futures Mechanics	p. 20
A Typical Futures Portfolio	p. 27
Where Are the Data?	p. 41
The CTA Universe and Your Range of Choices	p. 42
The Fluid Composition of a Database	p. 44
How Backfilled Data Can Mislead	p. 46
Trading Programs and Lengths of Track Records	p. 48
Returns Net of Fees and Share Classes	p. 49
Sources of Data for Indexes of CTA Performance	p. 50
Structuring Your Investment: Frequently Asked Questions	p. 53
How Many Managers Should You Choose?	p. 55
What Are CTA Funds?	p. 58
What Are Multi-CTA Funds?	p. 60
What Are Managed Accounts?	p. 62
What Are Platforms?	p. 66
How Do You Compare and Contrast These Offerings?	p. 66
Who Regulates CTAs?	p. 68
How Are Structured Notes and Total Return Swaps Used by CTA Investors?	p. 69
What Are the Account Opening Procedures for a Managed Account?	p. 69
What Is the Minimum Investment in a CTA?	p. 71
What Does It Mean When a Manager Is Closed?	p. 71
What Are the Subscription Procedures for a Fund?	p. 71
Conclusion	p. 72
Building Blocks
How Trend Following Works	p. 75
The Two Basic Strategies	p. 76
Making the Systems Work in Practice	p. 79
Transactions Costs	p. 87
Other Considerations	p. 87
Case Study: Two Models from 1994-2003	p. 89
Rates of Return and Leverage	p. 94
Commodities and Capacity Constraints	p. 94
Market Environment and Give-Backs	p. 97
Two Benchmarks for Momentum Trading	p. 99
Data and the Trend-Following Sub-Index	p. 101
Trend-Following Models	p. 108
Laying the Groundwork for Analyzing Returns to Trend Following	p. 108
Constructing a Portfolio	p. 110
Simplifying Assumptions	p. 114
How Did the Models Do?	p. 115
The Newedge Trend Indicator	p. 124
Next Steps	p. 124
The Value of Daily Return Data	p. 129
How Good Are Daily Data?	p. 130
Estimating Return Volatility	p. 138
Distributions of Estimated Volatility	p. 139
Beware a False Sense of Confidence	p. 145
What If Underlying Returns Are Highly Skewed?	p. 146
Effect on Drawdown Distributions	p. 148
Every Drought Ends in a Rainstorm: Mean Reversion, Momentum, or Serial Independence?	p. 151
A Focus on Conditional Returns	p. 152
The Costs of Being Wrong about Timing Investments Can Be Substantial	p. 152
The Data	p. 153
The Test Tally	p. 155
Test for Serial Dependence: Autocorrelation	p. 156
Test for Serial Dependence: Runs	p. 163
Conditional Return Distributions	p. 165
Conclusion	p. 175
Understanding Drawdowns	p. 181
Drawdown Defined	p. 182
What Should They Look Like?	p. 183
What Forces Shape the Distributions?	p. 184
The Distribution of All Drawdowns	p. 185
The Distribution of Maximum Drawdowns	p. 187
The Core Drawdown Function	p. 190
Empirical Drawdown Distributions	p. 192
Reconciling Theoretical and Empirical Distributions	p. 192
Putting a Manager's Experience in Perspective	p. 197
What about Future Drawdowns?	p. 198
Further Questions	p. 199
How Stock Price Volatility Affects Returns	p. 201
A Look at Historical Returns	p. 202
Stock Price Volatility and Returns on the S&P 500	p. 203
S&P 500 Volatility Dominates Market Volatility	p. 206
CTA Returns, Correlations, and Volatility	p. 210
Conclusion	p. 215
The Costs of Active Management	p. 217
Forgone Loss Carry-Forward	p. 217
Liquidation and Reinvestment	p. 220
Other Costs	p. 224
Conclusion	p. 225
Measuring Market Impact and Liquidity	p. 227
A Very Fat Data Set	p. 229
A Representative Market Maker	p. 234
Fitting the Curve to the Data	p. 237
Hidden Liquidity	p. 238
Estimating the Risk-Aversion Parameter	p. 243
Volume, Volatility, and Market Impact Profiles	p. 243
Where Do We Go from Here?	p. 246
Appendix	p. 247
Portfolio Construction
Superstars versus Teamwork	p. 253
The Contribution of Low Correlation to Portfolio Performance	p. 255
How Reliable Are Correlation Estimates?	p. 256
The Contest	p. 262
Dropping and Adding Managers	p. 270
The Value of Incremental Knowledge about Return Distributions	p. 275
The Costs of Dropping and Adding Managers	p. 277
A New Look at Constructing Teamwork Portfolios	p. 279
Why Look Back?	p. 281
A Fresh Look at the Original Research	p. 282
Two New Approaches	p. 287
Comparing the Four Approaches	p. 291
Reviewing the Results	p. 296
Correlations and Holding Periods: The Research Basis for the Newedge AlternativeEdge Short-Term Traders Index	p. 297
Review of Previous Research	p. 298
Index Methodology and Construction	p. 304
How Low Are the Correlations?	p. 305
Why Are the Correlations Low?	p. 308
Holding Period and Return Correlation	p. 308
Why Are There Not More Short-Term Traders?	p. 313
Replicating the Index	p. 314
Cautions and Managing the Index	p. 316
Conclusion	p. 316
Appendix	p. 316
ôThere Are Known Unknownsö: The Drag of Imperfect Estimates	p. 319
Improving Risk-Adjusted Returns	p. 321
Throwing Out the Losers	p. 331
Due Diligence and Evaluation	p. 338
Bibliography	p. 341
About the Authors	p. 343
Index	p. 345
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