CTA Research Results
Posted: Mon Dec 19, 2011 4:02 am
After conversing with a brokerage firm last week about CTA performance track records, I decided to update some of my previous research. I thought some members here might find it of interest.
The brokerage firm was considering adding a new CTA to their marketing lineup and was asking my opinion. They thought that based on a particular CTAs MAR Ratio (Compounded Annual Growth Rate / Maximum Drawdown) that his performance was excellent.
I had to agree that his performance looked decent but that I thought the manager had simply been lucky so far. The reason is that the manager’s track record was fairly short, and his drawdown was well below his average annual return and showed a MAR ratio much higher than average. Also, the manager had volatility that in my experience foretells of higher drawdowns, and he used margin-to-equity ratios that in my experience also warned of higher drawdowns.
To help back up my point, I generated a few graphs. The first one below is the relationship of maximum drawdown to track record length. What it clearly shows, is that the longer one trades, the higher their maximum drawdown trends to be. Meaning that if one gives a new manager enough time, chances are his future drawdown will be larger than his past one. This is not news to most of us here. We all know the saying about “your largest drawdown has yet to occurâ€
The brokerage firm was considering adding a new CTA to their marketing lineup and was asking my opinion. They thought that based on a particular CTAs MAR Ratio (Compounded Annual Growth Rate / Maximum Drawdown) that his performance was excellent.
I had to agree that his performance looked decent but that I thought the manager had simply been lucky so far. The reason is that the manager’s track record was fairly short, and his drawdown was well below his average annual return and showed a MAR ratio much higher than average. Also, the manager had volatility that in my experience foretells of higher drawdowns, and he used margin-to-equity ratios that in my experience also warned of higher drawdowns.
To help back up my point, I generated a few graphs. The first one below is the relationship of maximum drawdown to track record length. What it clearly shows, is that the longer one trades, the higher their maximum drawdown trends to be. Meaning that if one gives a new manager enough time, chances are his future drawdown will be larger than his past one. This is not news to most of us here. We all know the saying about “your largest drawdown has yet to occurâ€