This is it. From our scrubbed database of 300+ managers we picked 64 CTAs to run the gauntlet of our tournament. Round after round, one performance metric after another, we’ve narrowed the field down to just 4 surviving CTAs. The end is in sight, and two more metrics from our database will determine which CTA gets the bragging rights as the winner of Managed Futures Madness.
In Round 3 we turned to a ratio of risk to reward to decide the round. The Sterling Ratio, which is Compound ROR divided by Average Annual Drawdown – 10%, is just one of veritable alphabet soup of acronyms and eponymous formulas that investors use to evaluate managers. And another of these metrics has been selected to determine who will make it to the final round of our tournament: Sortino Ratio.
Like the Sterling Ratio, the Sortino Ratio is a measure of risk-weighted returns – risk in this case being defined as volatility. But unlike Sterling, which penalizes a program for any volatility, whether positive or negative, Sortino only penalizes a program for downside volatility. This is pretty intuitive… investors probably aren’t going to be upset with a program that brings huge upward spikes in returns, but they’re sure to get nervous around one with lots of large downturns. We’ve discussed the Sortino Ratio in depth before if you’re interested in learning more. The Sortino Ratio is calculated using the following formula: Sortino = (Compound ROR – risk free ROR) / (Standard Deviation of Negative Returns).
So how did the Semi-Final matchups wind up with Sortino Ratio as the deciding metric? Between the two lower seeded programs in the Semi-Final, Junzi Capital advanced over White River, while on the other side of the bracket it was Global Ag over Covenant.
And that left us with a final round matchup between #11 seed Junzi Capital and #3 seed Global Ag. So what metric was selected to determine the final? Lowest Maximum Drawdown. It may not be as complex as some of the other measures we’ve looked at, but it’s no less important. Max DD is very simple – it’s the largest peak-to-valley equity loss that a program has experienced in its track record.
No program is without losses, but it can be tough for an investor to stick with a manager when their account is down -25% or -50% from a previous high. And of course, climbing out of a hole is always more work than falling into one – it takes a 33.3% gain to erase a -25% loss, and a 100% gain to erase a -50% loss. If you can’t imagine yourself being able to stomach a progam’s Max DD hitting your allocation, then that program probably isn’t for you. And how did the final round turn out with Max DD as the deciding metric? Junzi Capital prevailed with a Max DD of -9.0% versus Global Ag’s -17.6%.
That brings our tournament to a close. Congratulations to Junzi Capital for winning our gauntlet of performance measures, and to the winner of our bracket-picking contest.