CTA Research Results

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DPH
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CTA Research Results

Post by DPH » 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€

LeviF
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Post by LeviF » Mon Dec 19, 2011 9:09 am

What does CAGR vs. margin/equity look like?

Chris67
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Post by Chris67 » Tue Dec 20, 2011 2:58 am

DPH
Interestingpost and thanks for posting

Do you not find it interesting that something so utterly obvious is
a) Something that the brokerage firm would have already understood
b) Something that should as clear as daylight to anyone in the industry who does the simplest research project ?
c) Somthing that anyone allocating assets would have worked out - in fact do you even need to work it out it should be so obvious that the longer the track reccord the deeper the draw down will be because the more new "events" one will come up against ?

As you say though - obvious to anyone on this forum but perhaps not elsewhere ?

I was recently doing a similar project loking at teh HSBC private banking review of hedge fund performance - again easy to see teh pattern of best performances over the long run always accompanied by higher volatility and bigger draw downs
Anyway one other observation I made is that pound for pound / risk adjusted Paul Tudor Jones still quite possibly the best of all time
Still CAGR > 20% over 25 years with max D/D of 17% an exception to the rule ?

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Post by AFJ Garner » Tue Dec 20, 2011 4:35 am

LeviF wrote:What does CAGR vs. margin/equity look like?
Yes, I was wondering the same thing. And god knows what Dean's tables and graphs would look like if non-surviving CTAs were included.

DPH
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Post by DPH » Tue Dec 20, 2011 7:26 am

Here is the graph with CAGR verses margin. I also kept the Drawdown on it, so it is clearly visible that the rise in CAGR did not keep pace with the rise in Drawdown as margin usage rose.

Image

Yes Chris, the competence of many in the financial industry is truly scary. Most would consider their financial health right up there with their physical health and legal health, yet the barrier to calling oneself a “financial advisorâ€

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