Managed Futures Strategies

April 23, 2012

Conclusion
Managed futures strategies represent exposure that was once only available to the institutional investor community and characterized by high fees, lockups, leverage and opaque strategies. Only recently have managed futures strategies started to become available in liquid, transparent vehicles. Although the DTI represents exposure to one specific managed futures systematic trading strategy, there is research indicating the vast majority of CTA returns can be explained by such exposure to systematic trading approaches. The DTI serves to crystallize the exposure in a simple rules-based algorithm providing exposure to effective and representative managed futures strategies.

As the number of asset classes that provides low correlation to traditional equity and bond portfolios becomes increasingly sparse, we believe investors and advisors would benefit from understanding the pros and cons of the various managed futures offerings coming to market.

Endnotes

  1. Barclay Hedge Alternative Investment Databases, 2011
  2. Commodity trading advisors – investment managers charged with making buy and sell decisions usually in the commodity spot, physical and futures markets on behalf of investors. There is no guarantee that a CTA will meet his/her objective, and investors may lose money.
  3. Mutual funds – an investment vehicle in which investors pool assets together and a professional money manager makes investment decisions on the shareholders’ behalf to try to meet the fund’s objective. There is no guarantee that a mutual fund will achieve its stated objective, and investors may lose money.
  4. Exchange-traded funds – an investment vehicle in which investors buy a share of a fund that attempts to provide returns, less fees and expenses, of a stated objective (e.g., U.S. equity market, the price of gold). Investors may lose money in such investments.
  5. L’habitant, F-S, “Handbook of Hedge Funds,” The Wiley Financial Series.
  6. Bhardwaj, G., Gorton, G., Rouwenhorst, G. “Fooling Some of the People All of the Time: The Inefficient Performance and Persistence of Commodity Trading Advisors.” Yale IFC Working Paper, October 2008.
  7. Alpha is a risk-adjusted measure of the active return on an investment. It is the return in excess of the compensation for the risk borne, and thus commonly used to assess active managers’ performance.
  8. The Barclay CTA Index is an industry benchmark of representative performance of commodity trading advisors. There are currently 565 programs included in the calculation of the Barclay CTA Index for the year 2011, which is unweighted and rebalanced at the beginning of each year.
  9. The CASAM CISDM CTA/CPO indexes represent a series of both asset-weighted and equal-weighted performance indexes of commodity trading advisors and commodity pool operators in the CASAM CISDM Hedge Fund/CTA Database. Currently there are 20 indexes.
  10. Diversified Trends Indicator and DTI are registered marks of AFT and have been licensed by the fund. The fund is not sponsored, endorsed, sold or promoted by AFT.
  11. Zephyr StyleADVISOR, WisdomTree
  12. S&P 500 Index – capitalization-weighted index of 500 stocks selected by the Standard & Poor’s Index Committee designed to represent the performance of the leading industries in the U.S. economy.
  13. Maximum drawdown measures the peak-to-trough decline during a specific record period of an investment. A drawdown is usually quoted as the percentage between the peak and trough.

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