Managed Futures for Institutional Investors: Analysis and Portfolio Construction

Overview

Managed futures are an essential part of the investment industry.Within this arena,managed futures professionals—also known asCommodity Trading Advisors (CTAs)—actively manage clientassets using global futures and other derivative securities.

Authors Galen Burghardt and Brian Walls—part of NewedgeUSA, a global multi-asset brokerage firm based out ofChicago—have extensive experience in the managed futuresspace, and now, with Managed Futures for InstitutionalInvestors, they ...

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Overview

Managed futures are an essential part of the investment industry.Within this arena,managed futures professionals—also known asCommodity Trading Advisors (CTAs)—actively manage clientassets using global futures and other derivative securities.

Authors Galen Burghardt and Brian Walls—part of NewedgeUSA, a global multi-asset brokerage firm based out ofChicago—have extensive experience in the managed futuresspace, and now, with Managed Futures for InstitutionalInvestors, they address the issues that will allow you to gaina firm understanding of this field and improve the performance ofyour portfolios through the use of CTAs.

Divided into three comprehensive parts, the book opens with adetailed discussion of how thisspecific industry works. Here,everything from cash management practices and calculating a rate ofreturn on something that has no net liquidating value is covered.You'll also gain insights on the most common vehicles for investingin CTAs,including funds, platforms, and managed accounts.

Part Two, Building Blocks, offers some informative answers tothe tough questions surrounding CTAs. Throughout this section,Burghardt and Walls touch on a number of topics, such as how trendfollowingworks and what active management of CTA investments reallycosts. Along the way, they also show how to put a CTA's drawdownexperience in perspective and take a close look at how the singlemost important source of volatility in world financial marketsaffects the relationship between stock returns and CTA returns.

Rounding out this in-depth look at CTAs and managed futures,Part Three, Portfolio Construction,examines how the predictabilityof volatility and correlation can be used to build portfolios thatperform well. Here, the authors share their insights into thethings that will help, and hinder, you in creating awell-diversified portfolio. They also show how to identify lowcorrelation reliably and where the past, in fact, does revealsomething useful about the future.

Using futures as part of any actively managed portfolio isessential. This reliable guide offers a practical look at what CTAsand futures are all about, and how they can be used to evaluate andmeet risk, return, and liquidity objectives.

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Product Details

  • ISBN-13: 9781576603741
  • Publisher: Wiley
  • Publication date: 5/3/2011
  • Series: Bloomberg Financial Series, #102
  • Edition number: 1
  • Pages: 351
  • Sales rank: 1,460,498
  • Product dimensions: 6.00 (w) x 9.00 (h) x 1.40 (d)

Meet the Author

Galen Burghardt is Director of Research for Newedge USA,LLC, a joint venture between Calyon and SociétéGénérale. He is the lead author of The Treasury BondBasis and The Eurodollar Futures and Options Handbook, whichare standard texts for users of financial futures. He was anadjunct professor offinance in the University of Chicago's GraduateSchoolof Business (now the Booth School). He was the headoffinancial research for the Chicago Mercantile Exchange, and gainedaccess to the world of futures through his work in the CapitalMarkets Section of the Federal Reserve Board. His PhD in economicsis from the University of Washington in Seattle.

Brian Walls is the Global Head of Research at NewedgePrime Brokerage, the foremost provider of brokerage services to themanaged futures industry. "He has worked in the financialservices industry for thirty years in the various capacities oftrading, operations, management, and research. "He was apioneer of capital introduction services and is a sought after andtrusted advisor to many Commodity Trading Advisors, global macromanagers, fund of funds and institutional investors. He is thechairman of the Newedge Index Committee.

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Table of Contents

Acknowledgments.

Introduction: Why Invest in CTAs?

What Kind of Hedge Fund is a CTA?

Why Do CTAs Make Money?

How Much Should You Invest?

What About the Risks?

They're a Good Fit for Institutional Investors.

How the Book is Structured.

Part I: A Practical Guide to the Industry.

Chapter 1 Understanding Returns.

Risk and Cash Management.

Trading, Funding, and Notional Levels.

The Stability of Return Volatilities.

Basic Futures Mechanics.

A Typical Futures Portfolio.

Chapter 2 Where Are the Data?

The CTA Universe and Your Range of Choices.

The Fluid Composition of a Database.

How Backfilled Data Can Mislead.

Trading Programs and Lengths of Track Records.

Returns Net of Fees and Share Classes.

Sources of Data for Indexes of CTA Performance.

Chapter 3 Structuring Your Investment: FrequentlyAsked Questions.

How Many Managers Should You Choose?

What are CTA Funds?

What are Multi-CTA Funds?

What are Managed Accounts?

What are Platforms?

How Do You Compare and Contrast These Offerings?

Who Regulates CTAs?

How are Structured Notes and Total Return Swaps Used by CTAInvestors?

What Are the Account Opening Procedures for a ManagedAccount?

What is the Minimum Investment in a CTA?

What Does It Mean When a Manager is Closed?

What Are the Subscription Procedures for a Fund?

Conclusion.

Part II: Building Blocks.

Chapter 4 How Trend Following Works.

The Two Basic Strategies.

Making the Systems Work in Practice.

Transactions Costs.

Other Considerations.

Case Study: Two Models from 1994–2003.

Rates of Return and Leverage.

Commodities and Capacity Constraints.

Market Environment and Give Backs.

Chapter 5 Two Benchmarks for Momentum Trading.

Data and the Trend Following Sub-Index.

Trend Following Models.

Laying the Groundwork for Analyzing Returns to TrendFollowing.

Constructing a Portfolio.

Simplifying Assumptions.

How Did the Models Do?

The Newedge Trend Indicator.

Next Steps.

Chapter 6 The Value of Daily Return Data.

How Good Are Daily Data?

Estimating Return Volatility.

Distributions of Estimated Volatility.

Beware a False Sense of Confidence.

What if Underlying Returns are Highly Skewed?

Effect on Drawdown Distributions.

Chapter 7 Every Drought Ends in a Rainstorm: MeanReversion, Momentum, or Serial Independence?

The Costs of Being Wrong about Timing Investments Can BeSubstantial.

The Data.

The Test Tally.

Test for Serial Dependence: Autocorrelation.

Test for Serial Dependence: Runs.

Conditional Return Distributions.

Conclusion.

Chapter 8 Understanding Drawdowns.

Drawdown Defined.

What Should They Look Like?

What Forces Shape the Distributions?

The Distribution of all Drawdowns.

The Distribution of Maximum Drawdowns.

The Core Drawdown Function.

Empirical Drawdown Distributions.

Reconciling Theoretical and Empirical Distributions.

Putting a Manager’s Experience in Perspective.

What about Future Drawdowns?

Further Questions.

Chapter 9 How Stock Price Volatility Affects Returns.

A Look at Historical Returns.

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

S&P 500 Volatility Dominates Market Volatility.

CTA Returns, Correlations, and Volatility.

Conclusion.

Chapter 10 The Costs of Active Management.

Forgone Loss Carry Forward.

Liquidation and Reinvestment.

Other Costs.

Conclusion.

Chapter 11 Measuring Market Impact and Liquidity.

A Very Fat Data Set.

A Representative Market Maker.

Fitting the Curve to the Data.

Hidden Liquidity.

Estimating the Risk Aversion Parameter.

Volume, Volatility, and Market Impact Profiles.

Where Do We Go from Here?

Appendix.

Part III: Portfolio Construction.

Chapter 12 Superstars versus Teamwork.

The Contribution of Low Correlation to PortfolioPerformance.

How Reliable Are Correlation Estimates?

The Contest.

Dropping and Adding Managers.

The Value of Incremental Knowledge about ReturnDistributions.

The Costs of Dropping and Adding Managers.

Chapter 13 A New Look at Constructing TeamworkPortfolios.

Why Look Back?

A Fresh Look at the Original Research.

Two New Approaches.

Comparing the Four Approaches.

Reviewing the Results.

Chapter 14 Correlations and Holding Periods:  TheResearch Basis for the Newedge AlternativeEdge®Short-Term Traders Index.

Review of Previous Research.

Index Methodology and Construction

How Low are the Correlations?

Why Are the Correlations Low?

Holding Period and Return Correlation

Why Are There Not More Short-term Traders?

Replicating the Index.

Cautions and Managing the index.

Conclusion.

Appendix.

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

Improving Risk Adjusted Returns.

Throwing Out the Losers.

Due Diligence and Evaluation.

Bibliography.

About the Authors.

Index.

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