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

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32.10 COST OF ACTIVE MANAGEMENT

After an allocation to a managed futures trader is made, most firms institute a specific formal monitoring and review process. Although individual firms may have proprietary processes, most include the following central elements:

  • Quantitative comparison. On a regular basis, each investment will be quantitatively compared on the basis of its realized return and its risk, as well as on the basis of its correlation structure to its history, to designated peers, and to manager benchmarks. During this process, deviations from expectations and/or historical performance are identified.
  • Idiosyncratic behavior monitoring. While quantitative comparison is usually done on a continuous basis, any idiosyncratic performance among managed futures traders typically leads to a more formal review, which is conducted on a periodic (generally semiannual or annual) schedule. At that time, other aspects of the investment are also reviewed, particularly regarding changes in any of the following areas: strategy, markets traded, key personnel, risk, operations, liquidity, or counterparties.
  • Due diligence review. Also on a periodic basis (usually annually), a due diligence review is performed. At that point, the investment can be formally reapproved for the next investment horizon.

The previous examples of an investment monitoring process are presented as an illustration of practices found in firms allocating to managed futures traders. They do not differ materially from ...

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