Page 1 of 1

Do cta records overstate money taken out?

Posted: Wed Aug 13, 2003 4:23 pm
by Nathan
I think I read in one of schwager's books that people tent to time their investments with trend following CTA's rather poorly. I was reminded of this when I read a post by Kiwi in another topic: A trader had two great years with a program, but withdrew his capital at a loss on a drawdown in the third year. Other Memebers have also mentioned that new trendfollowers often get their capital yanked on the first big drawdown, perhaps as much as 90%. Does anyone know the numbers on this?

This lead me to a few other questions. First, if you look at the long term compounded return, it would appear that over time these guys were taking tons of money out of the markets for their clients. however, If they are always managing a ton of capital right before the drawdown, and smaller amounts right before profits explode upwards, could it be that this is not the case? To me, this would imply that a class of traders who at first appear to be siphoning tons of money out of the markets may in fact be net contributers, or at least taking a LOT less out that you would expect. (when client capital flows factored in). I may be taking the idea too far, but Im trying to explain my though.

Lastly, this made me wonder if the large client withdraws were a nessisary part of the long term success of trend following. Perhaps these programs bump against the capasity of the markets at equity peaks, the system breaks down, and only reasurts itself after the exess capasity is "washed out" of the markets. obviously their are other factors, but could this be one of them? Af far as i know the futures markets are zero sum. Perhaps it is an illusion that the masses could allocate a small % of their porfolio to cta funds to diversify. If they "All" did that, the systems would break down, but the zero sum game would continue on. It is flat out impossible for the majority of traders (trading capital) to succeed, no matter how good the system. However, selling this idea to the public may make it easier for other classes of traders to profit.

Obviously this is a speculative assertion, but if anyone had any data, theorys, or opinions of their own, I would like to hear.