CAIA Level II: Advanced Core Topics in Alternative Investments, 2nd Edition

CHAPTER 31

Risk and Performance Analysis in Managed Futures Strategies

Managed futures strategies have the same elements of risk found in all investment strategies. Much of the work that has been done to provide a framework for measuring investment risk can also be applied to managed futures products. However, the managed futures industry has developed some ways of measuring and describing risk of managed futures programs that are unique to the industry, and it is worthwhile to discuss some of these. Commodity trading advisers (CTAs) are commonly described as strategies that should be held in a portfolio because they tend to perform well when traditional asset classes, especially equities and high-yield bonds, perform poorly. This chapter closely examines this property of CTAs. Finally, most institutional investors seek benchmarks to measure the performances of the asset classes that comprise their portfolios. Because of the wide variety of trading processes employed, it is generally difficult to create single passive investable benchmarks for CTAs. This chapter examines the existence of investment benchmarks, the separation of beta and alpha in CTA returns, and volatility exposures of CTAs.