CAIA Level II: Advanced Core Topics in Alternative Investments, 2nd Edition

31.7 CONCLUSION

To understand the risk-return properties of CTAs, one needs to apply special measures designed to account for special characteristics of CTAs. The fact that CTAs allow investors to gain exposure to a variety of markets with minimal investments and that the margin requirement for each contract is closely linked to the riskiness of the underlying market means investors should carefully examine the amount of margin that a CTA is carrying. In addition to the margin-to-equity ratio, investors should use other metrics, such as volatility, VaR, and CaR, to gain a better understanding of a CTA's risk profile.

One important issue that investors need to address is the lack of proper benchmarks for CTAs in general, and discretionary CTAs in particular. Although passive strategies have been developed to mimic the risk-return properties of trend-following CTAs, no such passive strategies have been developed for discretionary CTAs. The MLM Index represents one such attempt to produce a passive and investable benchmark for systematic CTAs. The performance of this index can be used to estimate the returns on CTAs due to their beta exposures to a passive trend-following strategy. The results presented in this chapter showed that less than 50% of the return earned by trend-following CTAs is due to their beta exposure to a passive trend-following index.

This chapter has also examined the role of CTAs in providing downside protection for traditional asset classes, such as equities ...