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Commodity Trading Advisors

Commodity Trading Advisors. Managed futures Dr Sheeba Kapil . 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

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Commodity Trading Advisors

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  1. Commodity Trading Advisors Managed futures Dr Sheeba Kapil

  2. 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

  3. 1. CTAs are traders (individual, firm) qualified & licensed by the CFTC 2. Provide specific futures trading advice for commodity trading 3. Provide specific trading recommendations 4. When to establish long/ short positions in • Metals • Grains • Soft commodities

  4. Regulation Held accountable, & have to comply with many rules and regulations set forth by the CFTC Register with CFTC Furnish Rigorous disclosure documents reviewed by NFA

  5. 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

  6. 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

  7. 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

  8. 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

  9. 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.

  10. Risk-Adjusted Return • Dispersion of losses • Calmar ratio • Sharpe ratio • Alpha coefficients • Compare performance in relation to certain std benchmarks like sensex, nifty

  11. Top 10 CTA- (2004-07)

  12. Top 10 CTA- (2004-07)

  13. 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

  14. 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 obtained max Σur yro + uo/ Σ vixio

  15. 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

  16. 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

  17. 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

  18. 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

  19. 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.

  20. Thank you

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