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Commodity Trading AdvisorsManaged futures

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Managed futures 30 yr old industry of professional money managers

k/a CTAs

Objective: seek profit potential Lower portfolio risk: diversification Negative correlation : stocks & bonds Maintain positive returns even in bear markets

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1. CTAs are traders (individual, firm) qualified & licensed by the CFTC

2. Provide specific futures trading advice for commodity trading

3. Provide specific trading recommendations4. When to establish long/ short positions in

Metals Grains Soft commodities

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Regulation Held accountable, & have to comply with many rules

and regulations set forth by the CFTC

Register with CFTCFurnish Rigorous disclosure documents reviewed by

NFA

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HISTORY Exchange traded equity derivatives 4-6 yrs old Future exchange physical commodities 1875 Cotton was the 1st product to be traded, oilseeds, jute,

wheat etc After independence UK 1947 set back 1952:cash settlement & option trading was banned

FMC: commodity futures market began taking shape 2002: NMCE 2003: MCX & NCDEX

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Exchanges list a no. of products But trading is only in handful

NMCE: 61 listed, 6 actively traded (jute, pepper, coffee) MCX: 9 of the 50 listed (precious metals, crude oil) NCDEX: 16 of the 39 listed (gaur & soy) NBOT: 1 of the 6 listed

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Evaluating CTAs Fees

Trading program (trend followers, market neutrals) Trend followers: proprietary technical or fundamental trading systems or

both When to go long/short in certain futures market Market Neutral Traders: profit from spreading different commodity markets, delta

neutral programs, non-directional trading strategies

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Drawdowns

Peak to valley drawdown Largest cumulative decline in trading account How long a CTA took to make back the losses Shorter the time required to recover from

drawdown the better the performance

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Annualized rate of return

These performance numbers are provided in the disclosure document, but may not represent the most recent month of trading.

want to know, for example, if there have been any substantial drawdowns that are not showing in the most recent version of the disclosure document.

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Risk-Adjusted Return

Dispersion of losses Calmar ratio Sharpe ratio Alpha coefficients Compare performance in relation to certain std

benchmarks like sensex, nifty

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Top 10 CTA- (2004-07)

Ranked compounded annual return

Programme name or manager 3- yrs comp. ann. returnChicago capital mgmt 75.37%Pixley capital mgt 66.59%Dighton worldwide 54.15%Dighton capital USA 49.36%Financial commodity investments 42.73%AAA Capital mgt (energy) 42.04%Rosetta capital mgmt 28.67%CKP finance associates 28.24%Commodity futures services 26.74%LJM Partners (neutral S&P Option) 24.35%

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Top 10 CTA- (2004-07)

Ranked by sharpe ratio

Programme name or managerK4 Capital mgmt 3.03Chicago capital mgmt 2.43AAA capital mgmt 2.19Financial commodity invsts 2.12Zenith resources (index options) 1.76Witter & lester (stock index) 1.71LJM partners 1.68Newton capital partners 1.57Zephyr asset mngmt 1.19Dightpon worldwide 1.11

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Literature review Literature on CTA efficiency non-existent (4 std)

CTAs use long/short positions coupled with leverage to enhance portfolio returns

Traditionally CTAs trade 50-100 futures contracts on various global markets & Attempt to minimize their losses as they occur

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International derivatives & securities mkts database CISDM, MSCI world index, HFR hedge fund composite index, zurich CTA index

Cross efficiency model help to examine the trading efficiency of CTAs

Following optimization obtainedmax Σur yro + uo/ Σ vixio

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Small CTAs trade less frequently

Are less efficient as large CTAs

Large CTAs take less risk (high fees )

Efficient CTAs also have high sharpe ratio & spearman correlation ranking is positive significant

Amount of leverage is related to performance

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Simple efficiency, Cross efficiency & super efficiency models can be used to select the CTAs

CTA have been found to reduce the volatility of portfolio in down markets

CTAs improve portfolio's mean variance characteristics, reduce incidence of kurtosis

CTAs truly add the importance of diversification

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CTAs provide greater shelter than hedge funds, mutual funds in bear markets because of their negative correlation to markets

All investors benefit by allocating resources via CTAs

SEBI must provide for adequate role of CTAs in Indian market

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The CTAs must be encouraged to participate in Indian market directly

They must ensure the benefit of the investors

They must be designed to add benefit to portfolios in downside market as shown by empirical results

Efficiency of CTAs must be monitored with help of efficiency models to safeguard the investors

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The government must sponsor studies on CTAs as trading advisors and their role in India

These studies must assess the need, relevance and efficiency of CTAs in Indian capital market

These studies should aim at maximizing the return to the individual as well as the institutional investor

With protection during downside market and lesser volatility, CTAs will definitely provide a thrust to portfolio returns for both government as well as the private institutional portfolios.

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Thank you