I was recently interviewed for a few articles and the the topic of overlaying strategies was discussed as a potential component of a managed futures portfolio. Realizing this topic is not discussed as much as it should be; it opens the door to a more in-depth understanding of managed futures. It is a topic I cover in my managed futures course at DePaul University.
For example, letâ€™s assume the following of a fictional CTA (Commodity Trading Advisor):
- The CTA trades a diversified systematic trend following model (Core model) in 20 markets in both financial and commodity futures.
- The model can be long, short or neutral in any of the 20 markets of its portfolio. (Neutral means the portfolio does not hold any positions in a particular market.)
- The size of each position is not static, but may be dynamic based on some formula built into the trading algorithm. For example: our fictional CTA may trade a 20 contract position in 30 year bond futures. On the next trade in that market, they may hold more or less contracts based on their trading strategy.
- Stops and other risk management tools may be used utilized for risk management purposes
The above assumptions imply the portfolio at any given time could hold positions in zero to 20 markets. And due to the dynamic nature of being long, short or neutral and the utilization of various risk management methods the portfolio may be very fluid causing changes in the portfolio due to the strategy components. Thus the equity curve of the portfolio creates a non-correlation potential to equities.
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Copyright Â©2011 Mark Shore. Contact the author for permission for republication at email@example.com www.shorecapmgmt.com Mark Shore publishes research, consults on alternative investments and conducts educational workshops. Mark Shore is also an Adjunct Professor at DePaul University’s Kellstadt Graduate School of Business in Chicago where he teaches a managed futures/ global macro course.
Past performance is not necessarily indicative of future results. Â There is risk of loss when investing in futures and options. Â Always review a complete CTA disclosure document before investing in any Managed Futures program. Â Managed futures can be a volatile and risky investment; only use appropriate risk capital; this investment is not for everyone. Â The opinions expressed are solely those of the author and are only for educational purposes. Please talk to your financial advisor before making any investment decisions.