karoliukas

A commodity pool operator (CPO) is deciding whether or not to hire a particular commodity trading advisor (CTA). The CTA has a good track record of performance and often exhibits negative correlation with equities thus enhancing overall performance in down markets. Which of the following statements regarding whether or not the CPO should hire the CTA is most accurate? The CPO should:

A) not hire the CTA if their beta relative to other CTAs managing the pool of futures contracts is too low, as this indicates that the CTA’s past returns are low relative to the pool of operators.

B) hire the CTA only if its beta and correlation have been considered in determining its risk relative to the pool of operators.

C) not hire the CTA if their past performance is highly correlated with the pool of operators, as this indicates their volatility relative to the pool is high.

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In selecting a CTA to include in the portfolio, the manager should consider risk. For example, even though CTAs often exhibit negative correlations with equities, correlations among CTAs themselves can range anywhere from significantly positive (i.e., close to 1.0) to only modestly positive. In addition, the beta that relates the performance of an individual CTA to a fund of CTAs can be a good indicator of future risk-adjusted performance. Just as equity beta relates the volatility (risk) of an individual equity security or portfolio to the overall equity market, the CTA beta measures the risk of the individual CTA relative to a fund of CTAs.

karoliukas

Which of the following statements regarding what a managed futures trading strategy is called and how it is described is least accurate?

A) Unsystematic – the commodity trading advisor tracks specific commodity futures contracts and uses trading rules to signal when to buy and sell the contract.

B) Systematic – the commodity trading advisor trades according to market trends and may even use a contrarian strategy which trades against the market trend.

C) Discretionary – the commodity trading advisor uses their own discretion to buy futures contracts they feel are over or undervalued.

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Commodity trading advisor (CTA) strategies can be described as systematic or discretionary (not unsystematic). CTAs that specialize in systematic trading strategies typically apply sets of rules to trade according to short, intermediate, and/or long-term trends. They may also trade counter to trends in a contrarian (against the trend) strategy.
A discretionary trading strategy is based on the discretion of the CTA, in the same way that any active manager seeks value.
Managed futures can also be classified according to the markets in which they trade. They apply systematic or discretionary trading strategies in financial markets, currency markets, or diversified markets. In financial markets, they trade in financial (i.e., interest rate) and currency futures, options, and forward contracts. Those that specialize in currency markets trade exclusively in currency derivatives. A fund that trades in diversified markets trades in all the financial derivatives markets described as well as commodity derivatives.