Why would anyone invest in these funds?

[srinir]

Title of this thread indicated that why should anyone with this specific fund? Are you now questioning entire Managed futures strategy funds?

Regarding question of volatility, managed futures funds are like "straddles". With the low vol. on all asset classes, no wonder returns on these funds are poor now.

 

[Maverick1]

Er no the main point is that even if returns are low then it's still worth investing in uncorrelated strategies like CTA's

The main point of this thread that I started, is to call into question this assertion above, which is increasingly made by the managed futures industry. I'll ask again, what is the point of low correlation if you have very low Sharpe ratios and strings of long periods with no returns?

 

[Maverick1]

Title of this thread indicated that why should anyone with this specific fund? Are you now questioning entire Managed futures strategy funds?

Regarding question of volatility, managed futures funds are like "straddles". With the low vol. on all asset classes, no wonder returns on these funds are poor now.

see the Bloomberg article link posted above (post #13)

 

[srinir]

Thanks. I am surprised of his findings. I will take a look more once i get back home. But there are many white papers illustrating straddle nature of these trend following funds.

see the Bloomberg article link posted above (post #13)

 

[srinir]

The main point of this thread that I started, is to call into question this assertion above, which is increasingly made by the managed futures industry. I'll ask again, what is the point of low correlation if you have very low Sharpe ratios and strings of long periods with no returns?

Sharpe ratio measured over what periods? Most of these funds deliver "crisis alpha" during times of stress.

 

[globalarbtrader]

The main point of this thread that I started, is to call into question this assertion above, which is increasingly made by the managed futures industry. I'll ask again, what is the point of low correlation if you have very low Sharpe ratios and strings of long periods with no returns?

That isn't a recent assertion of the managed futures industry, as I've already said it's basic portfolio maths that has been around since the early 1950's. However as this theory has obviously passed you by let me show you an example.

Suppose you have a classic 60:40 equity / bond portfolio. Realistic forward looking numbers for performance would be mean of around 4% and vol of around 12%. Already note that the Sharpe Ratio is a mere 0.33, so adding even a 'rubbish' SR of 0.5 would improve this. The geometric mean is 3.3% (for people who only care about return not risk).

We have a choice of two assets we can add, a CTA with a SR of 0.5 (with equity like vol of 15% and a mean of 7.5%) or a fantastically good equity trader with a SR of 1.0 (also with equity like vol of 15%). The correlation of the CTA with the starting portfolio and the equity trader is -0.1. The correlation of the equity trader and stocks is 0.5.

The optimal weight to the equity trader is around 65%. This improves the SR to around 0.51 and the geometric mean return to 5.5%.

You might think there is no point adding the CTA to this portfolio. But in fact changing the portfolio so it is 30% CTA, 30% traditional, 40% equity trader improves the SR to 0.94 and the geometric mean to 8.9%.

This analysis actually understates the benefit of CTAs since correlation is a linear measure and SR is an symmetric measure.

GAT

 

[truetype]

see the Bloomberg article link posted above (post #13)

By "volatility," institutional investors actually mean "equity selloff," which is all they really care about. Managed futs did well in 2008. Obviously "volatility" per se isn't good or bad for trendfollowers. If ES rises 2% today and falls 2% tomorrow, it's "volatile" but the trendies make zero.

We have a choice of two assets we can add, a CTA with a SR of 0.5

That's where you & Mav can agree to disagree. He doesn't believe the true Sharpe of the trendies is ½.

 

[Sig]

Several of you are confusing the Sharpe ratio of the fund vs what adding this fund to your portfolio does to the Sharpe ratio of your portfolio. Uncorrelated assets are a pretty fundamental concept of Modern Portfolio Theory, and the impact can be explained purely in statistics terms. It's not really relevant to trading, this is something that you'd care about if you were managing an endowment or retirement fund, but it's still interesting and worth investigating if you're curious like the OP since it's clearly non-obvious on it's face.

 

[Martinghoul]

Based on my personal experience, investors love CTAs with their low SR's. In fact, they often welcome a lower SR that can arise due to higher vol.

Diversification is the main reason, but CTAs are also supposed to have the advantage of liquidity.

Personally, I am not a fan of the CTA space overall, as I believe the promised benefits are overstated.

 

[truetype]

CTAs are also supposed to have the advantage of liquidity

In 2008, investors used their CTA holdings as an ATM, and were grateful to be able to. Other hedgefund managers were screwing them -- lockups, sidepockets.