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

32.2 ISSUES IN STRUCTURING A CTA INVESTMENT PROGRAM

Once investors decide to make an allocation to managed futures, they must tackle the problem of just how to structure the investment. To do this, they will need to follow a decision process that proceeds along the following lines.

First, the investor must determine how many CTAs he/she wants in the portfolio. Many family offices, and even some larger institutional investors, will decide to invest in a single CTA. This decision has the virtue of simplicity and is possible to implement by choosing one of the large, diversified trend-following CTAs, whose performance correlates highly with a trend-following benchmark. If the investor decides to utilize this approach, the focus should be on the examining differences between investing in a fund sponsored on behalf of the CTA versus a managed account.

Generally, the single-CTA route exposes the investor to a greater amount of risk. In this scenario, the results depend on the performance of a single manager, have concentrated risk to a single organization, and may be exposed to a limited number of trading models. To avoid these constraints, the investor is well advised to form a diversified portfolio of CTAs.

Second, the investor must decide how to create a diversified portfolio of CTAs. Initially, the most cost-effective approach to achieving diversification is to allocate to a multi-CTA fund. Then, as the size of the allocation to CTAs increases, more options become available to the ...