Mirror, Mirror – Who’s the Finest CTA of Them All?

One of the most common bits of advice we dole out is to invest in quality managers when they experience a drawdown. It’s not a hard and fast rule, but there’s a tendency for managed futures performance to follow a cyclical pattern. It’s why performance chasing often leads to disappointment, and why we prefer allocations during rough patches.

But timing can be about more than cycles – it can also make a difference where in that program’s life you allocate. We’ve noticed a common pattern of programs offering diminished risk/return profiles as they age, meaning it was better to be an early investor than a late one. But in practice, this can be difficult to visualize, as the compound rates of return and other metrics are calculated on the whole track record (including those usually higher returns).

Consider the following pair of VAMI (Value-Added Monthly Index) calculations:

Disclaimer: past performance is not necessarily indicative of future results. This comparison is hypothetical in nature and is only for educational purposes.

The first program appears to post consistent returns throughout its lifetime, while the second program offers a whole lot of nothing for the two-thirds of its existence, before rocketing up in the last third of its record. But both of them end up in the exact same place. So, which of these programs would you rather have invested in? Which do you believe has the higher volatility? The higher max drawdown?

Perhaps a look at their stats would help you decide?

CTA 1

CTA 2

Compound ROR

40.4%

40.4%

Annualized Volatility

46.5%

46.5%

Maximum Drawdown

-37.7%

-37.7%

What? They have the exact same Compound ROR, Volatility, and Maximum Drawdown?  Why yes, they do. That’s because these two “programs” are actually the exact same program with one minor change – we’ve put the second (red) set of returns in reverse chronological order. A sort of mirror image. No, we’re not getting bored and finding random things for interns to do. We just like to look at things from a different angle every now and then (180 degrees different in this case).  And here, the reverse view puts the difference between the early years and the recent returns into sharp relief, and shows how a program can turn into something very different as it ages. The fact that these two curves are so different – and yet the stats are exactly the same – also shows how you need to do more than just look at the basic stats of a program to get a feel for how it has traded.

So put your impressive CTA equity curve in front of the mirror, and see what its reverse cousin looks like. A rather flat line to start out, and you’re likely invested in yesterday’s success. Two closely aligned curves, and you’re likely seeing more consistent performance over time.

2 comments

  1. Interesting, but a log-scaled chart would have told you the same story!

    Lex

  2. If you try reinvestment the story changes and you cannot invert.

Write a Comment

Disclaimer
The performance data displayed herein is compiled from various sources, including BarclayHedge, RCM's own estimates of performance based on account managed by advisors on its books, and reports directly from the advisors. These performance figures should not be relied on independent of the individual advisor's disclosure document, which has important information regarding the method of calculation used, whether or not the performance includes proprietary results, and other important footnotes on the advisor's track record.

Benchmark index performance is for the constituents of that index only, and does not represent the entire universe of possible investments within that asset class. And further, that there can be limitations and biases to indices such as survivorship, self reporting, and instant history.

Managed futures accounts can subject to substantial charges for management and advisory fees. The numbers within this website include all such fees, but it may be necessary for those accounts that are subject to these charges to make substantial trading profits in the future to avoid depletion or exhaustion of their assets.

Investors interested in investing with a managed futures program (excepting those programs which are offered exclusively to qualified eligible persons as that term is defined by CFTC regulation 4.7) will be required to receive and sign off on a disclosure document in compliance with certain CFT rules The disclosure documents contains a complete description of the principal risk factors and each fee to be charged to your account by the CTA, as well as the composite performance of accounts under the CTA's management over at least the most recent five years. Investor interested in investing in any of the programs on this website are urged to carefully read these disclosure documents, including, but not limited to the performance information, before investing in any such programs.

Those investors who are qualified eligible persons as that term is defined by CFTC regulation 4.7 and interested in investing in a program exempt from having to provide a disclosure document and considered by the regulations to be sophisticated enough to understand the risks and be able to interpret the accuracy and completeness of any performance information on their own.

RCM receives a portion of the commodity brokerage commissions you pay in connection with your futures trading and/or a portion of the interest income (if any) earned on an account's assets. The listed manager may also pay RCM a portion of the fees they receive from accounts introduced to them by RCM.

See the full terms of use and risk disclaimer here.

Disclaimer
The performance data displayed herein is compiled from various sources, including BarclayHedge, RCM's own estimates of performance based on account managed by advisors on its books, and reports directly from the advisors. These performance figures should not be relied on independent of the individual advisor's disclosure document, which has important information regarding the method of calculation used, whether or not the performance includes proprietary results, and other important footnotes on the advisor's track record.

Benchmark index performance is for the constituents of that index only, and does not represent the entire universe of possible investments within that asset class. And further, that there can be limitations and biases to indices such as survivorship, self reporting, and instant history.

Managed futures accounts can subject to substantial charges for management and advisory fees. The numbers within this website include all such fees, but it may be necessary for those accounts that are subject to these charges to make substantial trading profits in the future to avoid depletion or exhaustion of their assets.

Investors interested in investing with a managed futures program (excepting those programs which are offered exclusively to qualified eligible persons as that term is defined by CFTC regulation 4.7) will be required to receive and sign off on a disclosure document in compliance with certain CFT rules The disclosure documents contains a complete description of the principal risk factors and each fee to be charged to your account by the CTA, as well as the composite performance of accounts under the CTA's management over at least the most recent five years. Investor interested in investing in any of the programs on this website are urged to carefully read these disclosure documents, including, but not limited to the performance information, before investing in any such programs.

Those investors who are qualified eligible persons as that term is defined by CFTC regulation 4.7 and interested in investing in a program exempt from having to provide a disclosure document and considered by the regulations to be sophisticated enough to understand the risks and be able to interpret the accuracy and completeness of any performance information on their own.

RCM receives a portion of the commodity brokerage commissions you pay in connection with your futures trading and/or a portion of the interest income (if any) earned on an account's assets. The listed manager may also pay RCM a portion of the fees they receive from accounts introduced to them by RCM.

See the full terms of use and risk disclaimer here.