Over the years of meeting emerging managers I’ve found a common theme among them. They often believe when they start a money management firm, investors will automatically find them and invest. In other words, it is the “I build it and they will come” perspective. The new managers often miss the point; they started a small business. With any business, there are many components to handle including marketing / business development, technology, hiring employees, vendors, compliance and operations. Similar to most businesses, marketing / business development is often the key to grow or slow the business. In this article we discuss several points related to marketing / business development.
Earlier this week we discussed the Red Rock Capital research paper discussing different metrics used to evaluate CTA risk adjusted performance. Sharpe has long been considered the go to statistic commonly referred to by brokers and CTAs in Managed Futures. Today we intend to cover the differences and make some conclusions on the Sortino vs. Sharpe ratio debate and give a different perspective on analyzing a CTA.
When investors think of risk, they usually associate it with volatility. This probably stems from Nobel Prize winning economist Harry Markowitz’s use of volatility in the 1950s and fellow Nobel Prize winner William Sharpe’s use of volatility in creating his self-named method of risk adjusting returns. The lower the volatility of a given investment theoretically indicates that investment carries less risk. Risk, however, could be viewed from a different angle. The impact of a high volatility investment on a portfolio can be mitigated by the allocation size given to that product. By normalizing for volatility, theoretically, high and low volatility investments can have equal impact on a portfolio’s total return. This leads us to a different way to view risk. Risk is the difference between the anticipated worst loss and the realized worst loss.
Many traders and investment managers have the desire to measure and compare CTA managers and / or trading systems. We believe risk-adjusted returns are one of the most important measures to consider since, given the inherent / free leverage of the futures markets, more return can always be earned by taking more risk. The most popular measure of risk-adjusted performance is the Sharpe ratio. While the Sharpe ratio is definitely the most widely used, it is not without its issues and limitations. We believe the Sortino ratio improves on the Sharpe ratio in a few areas. The purpose of this article, however, is not necessarily to extol the virtues of the Sortino ratio, but rather to review its definition and present how to properly calculate it since we have often seen its calculation done incorrectly.
Slightly negative results for the month extend a run of near-flat returns as most of the main economic themes identified by the managers showed little reaction. The position in which we had substantially expanded our risk and volume was held as long as possible, until late on “last position day” prior to physical delivery, and still did not bear fruit. Our policy is to not hold overnight positions during the delivery period so as not to expose investors to large, albeit temporary, margin calls.Our “bullspread” strategy in corn – i.e., long nearby and short deferred – was based on projection that U.S. producers would tend to market supply slowly since they had already taken much income from selling soybeans and would wait rather than liquidate all 2013-14 production within a narrow timeframe. Our forecast of demand for U.S. corn was aggressive, as Argentine farmers held back supply for financial reasons and Brazil deemphasized exports to make sure it met soybean commitments.
The two years of persistent market gains in a low volatility environment may have fueled speculative excesses “the likes of which have not been seen since the last bull market”. In the first day of trading in 2013 the NASDAQ Composite moved above its 100 day moving average and steadfastly remained above this average until April 4th the following year. The time span above this moving average was more than 15 months, a feat for the record books, going all the way back to the inception of the NASDAQ Composite in 1971. This is 4 months longer than the previous record. The second longest streak lasted 11 months, ending July 1983 nearly one year after the bull market began in August 1982. Measures of speculation were rampant in both these tops. For instance in the most recent period, discount brokerage firms’ transactions in February was the highest in over 10 years and 400% higher than in February 2009, which was near the bear market lows. The NASDAQ Composite in the month lost 2% and is 5.5% off the early March closing highs.
We are a little over half way through May and have approximately two-thirds of our CTAs updated through the month of April. Overall the index is flat and carried by agriculture and equity index manager trading for the month. Trend Following is so far posting a negative month with 73% of managers reporting. So overall on the year we are off to a moderate start as we get deeper into the second quarter. Without any significant trends we expect to see much of the same as the equity markets continue on the bull run. Agriculture should be particularly interesting as we head into planting season and this pig virus continues to play itself out.
“Flyberry Capital was founded in 2011 to deliver attractive risk-adjust returns, uncorrelated to most traditional and alternative investments, and unconditional to any single market or economic environment. The company relies heavily on research, using mathematics, “big data” and sentiment analysis techniques to develop proprietary trading models and strategies. Flyberry employs a quantitative trading program that opportunistically […]
The NFA has received more than 100 comment letters over a request for comment on contentious capital adequacy rules for CPOs and CTAs. NFA members and the wider public were invited in January to comment on the concepts of imposing a capital requirement on CPOs and CTAs as well as other customer protection measures. NFA spokesman confirmed it received 115 comment letters, with the “overwhelming majority” coming from the CPO/CTA community. The measures have provoked strong reaction from the industry and representatives for CTAs and CPOs to the NFA board of directors hosted a virtual town hall meeting to discuss them. Typically, opinion is collated and submitted by trade bodies, who have also made their concerns clear.
Investors and traders keep watching the Federal Reserve’s Open Market Committee for new signals on monetary policy but the curtains remain closely drawn. The statement issued by the FOMC Wednesday after its two-day meeting shed little light from the March 19 meeting. Other than the first paragraph, the statement was identical to the one released after the March meeting, said Sterling Smith, futures specialist and vice president for Commodity Research at the Citibank Institutional Client Group in Chicago.
Demeter Capital Management is a registered CTA with a Livestock and Grain Trading Futures and Options Program. The Livestock and Grain Trading Program attempts to generate profits through the Advisor’s discretionary selection of futures and options trades in agricultural markets. Trades are selected on the basis of fundamental analysis, which is concerned with any factor that would affect the supply and demand, and therefore the price, of a given instrument. The Advisor’s market analysis tends to focus on seasonal trends and year-to-year comparisons. The Advisor absorbs and interprets a wide range of research on a daily basis, employing its principals’s combined 40+ years of experience in agricultural futures markets.
Market players and analysts don’t expect a trumpet blast from the Federal Reserve Board’s Open Market Committee (FOMC) meeting on April 29-30, anticipating that there won’t be any major changes in monetary policy. The FOMC has been tapering its quantitative easing (QE) program in swatches of $10 billion and analysts expect another cut by that amount to about $45 billion in bond buying. Markets are not expected to react much to the FOMC actions unless there is something unexpected. Several analysts emphasized there is no press conference scheduled Wednesday after the statement is released at 2 p.m. EST, which indicates the FOMC won’t be doing any heavy lifting. Some analysts are looking ahead to the June FOMC meeting as the time the committee might be more forthcoming on monetary actions.
Quite a whippy week. Beans and wheat broke hard earlier in the week. Wheat broke on wetter forecasts and beans broke on all the distressed China cargos and import talk. Funds liquidated flat price beans and exited spreads. There was major unwinding going on. As the week wore on, there were more and more reports of wheat being ripped up (both HRW and SRW) as well as escalating tensions between Ukraine and Russia which provided support. Both US and Brazilian bean basis firmed, we continue to see positive bean and meal sales weeks, and crush margins remain strong – all providing support to old crop beans.