Top Commodity Trading Advisors Using Both Trend and Countertrend Models for Trading

FORT LP : Fort Global Diversified
Abraham Trading Company : Diversified Program
Quantica Capital – Quantica Managed Futures
Rabar Market Research – Diversified Program
Conquest Capital – Conquest Macro
Crabel Capital Management : Crabel Multi-Product

CTA returns have just been spectacular in the last 35 years. We cover more than 100+ CTAs, their performance, strategies and ideas. For these of you who still don’t know what is crisis alpha, we suggest you to read our article about it and go take it. This is especially suggested to people worried that the next global financial crisis might just be around the corner.

5 Reasons to Invest in Managed Futures

1. Outstanding Risk/Reward Profile through Diversification Beyond Traditional Investments in Stocks.

Managed futures can help you reduce your portfolio volatility and offer you a risk-return profile, that is very different than the traditional profiles of stock traders and hedge funds.

CTAs who manage futures are usually trading between 50 and 100 markets. Some money managers trade even 150 global markets; from grains and gold to currencies, stock indices and exotic markets such as potatoes in India or emissions in Europe. Many CTAs further diversify their returns by using many trading approaches and time-frames for trading.  They go long and short and there is always a winning market to hedge a losing one. This usually reduces risk and allows CTAs to have lower maximum drawdown and annual volatility than stock managers which trade in a market with high internal correlation.

Now, lets compare managed futures performance with stocks and bonds. The easiest way to calculate the most important investment metrics is to divide annual compound returns by maximum drawdown and by annual standard deviation. These are very simple but good enough ways to compare investments long-term. If we choose to trust the many stock market out-performance studies*, less than 1.5% of market traders and investors beat the market. This means that we can use the S&P 500 Total Return index risk-reward profile to compare to managed futures’ one.

1993-2013 (20 years) Barclays CTA Index (At equity volatility S&P 500 Total Return 50:50 Combination
Average Return (Annual) 10.19% 9.22% 10.37%
Standard Deviation (Annual) 14.94% 14.94% 10.10%
Max Drawdown 19.53% 50.95% 21.89%
Sharpe Ratio (Annual) 0.68 0.62 1.03
AR/MDD 0.52 0.18 0.47


Source: Trend Following with Managed Futures Book – Alex Greyserman and Kathryn M. Kaminski

As you can see the Sharpe ratio is very similar but still higher with managed futures. But we at OctaFinance believe that measuring sharpe is not enough. We as traders, measure our success by our maximum drawdowns. If maximum drawdowns never happen, we would be able to leverage our investments more and compound money at a crazy rate. So how does S&P500 Total return index stands to managed futures when it comes to maximum drawdowns? Managed Futures has 0.52 ratio AR/MDD while S&P500 Total Return Index has 0.18 ratio. This ratio is almost 3 times better for managed futures and shows why their risk-adjusted returns are much smoother and better as can be seen on the chart below.

Source: CME Grup

Source: Bloomberg

2. Crisis Alpha – Profit from Crisis

When we look at times when global economies and markets are in crisis, we see many enormous market moves. Sometimes we call them “tail risk” events as they are either not supposed to happen or happen very rarely. Managed Futures provide crisis alpha opportunities, which are profits generated by exploiting trends that occur across many markets during a crisis time.

This is a special characteristic of CTAs because they go as easily long as short. Because most of the managed futures’ commodity trading advisors utilize trend following, when we have a crisis periods such as: global macro events, global economic crisis, regional events, their managers short assets that are going down (are in downtrend) and make positive returns. This happens in a period when traditional assets such as stocks, mutual funds go down. That’s also the reason why diversifying a portfolio of stocks with managed futures is super smart, especially if you expect a stock market correction.

We at OctaFinance, even suggest increasing managed futures exposure in advance of giant expected stock market corrections. Important thing to keep in mind is that you have to measure CTAs crisis alpha and their ability to go short. For example there is a widespread trend today, for CTAs to look for short-term better risk-adjusted returns by not shorting stocks as they are in an uptrend. If they don’t switch to shorting at the right time (we doubt they will), they might lack the crisis alpha we are discussing here. That’s why you have to choose carefully and not only measure CTAs performance by historical risk-adjusted returns but also understand what they are doing and how. This will help you understand whether you are positioned correctly for the future. Below we show what crisis alpha mean to managed futures managers:

Source: CME GroupSource: BarclayHedge

3. Big Industry Growth and More Competition

We are strong believers that competition is good for the world, for your business and for you. Today, with more than 1700 CTAs to choose from, the choice who to manage your money in futures is easier. The managers also have longer track records which allow us to better study what they are doing and how they will probably perform in the future.

You can even use them to express your macro views. If you expect a big market correction for example, there are CTAs that are good at providing higher crisis alpha and will profit huge if such a correction takes place. They are more aggressive short sellers and have studied better how to short markets. If you believe that agriculture will make a huge move 100%+ in a few years, then you can invest in CTA that trade agriculture. They will catch the bull wave for sure and bring you profits. If you need help in choosing or making due diligence on CTAs, feel free to contact us.

4. More Transparency and Better Liquidity than Hedge Funds

Investment in managed futures usually offers better transparency as CTAs report their returns every week or month. Some of them also offer the ability to withdraw quick, in a week or two. This is because they invest in very liquid futures markets and can close positions much easier than hedge funds which are know to invest more in illiquid markets. Even though these advantages are present at many CTAs not all of them work that way. You should always get these details from any prospective CTA, you plan to invest in.

5. CTAs are Regulated. Their Futures Trading is also Regulated by the Exchanges

HISTORICALLY, futures exchanges have been very effective at not only protecting market participants but also from letting them perform better. For an example Forex Futures on regulated exchanges offer better carry, less slippage and same quotes unlike Spot Forex. When trading spot forex, every broker has different quotes and that means different performance for CTAs. This is without even mentioning questionable slippage from time to time. As it comes to carry – if CTAs trade for example USDRUB short, and the interest differential is +10%, their spot forex brokers will probably pay them max 8%. With forex futures, its much better. Interest is calculated automatically in the futures contracts and there is nobody to steal from you. That’s why you will probably get interest more close to 10% and for sure better than spot Forex brokers.

Managed futures are definitely more advantageous than direct equity investments. This is because the profits or losses that one realizes from this form of investment are not directly correlated to a specific market sector. Commodity trading advisors are still able to get profits from the investments they make on their clients’ behalf whether the stocks, or any other commodity, go up or down in price.

In other words, CTAs and managed futures have the unique position of being able to profit on either side of the markets. Future trading is all about positioning oneself correctly as according to the perceived movement of the market. Futures traders are not limited to bullish or bearish markets as well, because there are strategies unique to futures trading that allow profiting even from flat or neutral markets. Traders can use options and spreads to profit from a very unique market situations.

Because of CTAs exposure to various markets, managed futures offer better diversification and risk mitigation as compared to other forms of investment. This capability also provides investors adequate hedging against inflation while remaining liquid and transparent.

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