Mon, Aug 3, 2015
A A A
Welcome Guest
Free Trial RSS
Get FREE trial access to our award winning publications
Opalesque Futures Intelligence

Futures Lab: New handbook by Mark Melin offers comprehensive guidelines for managed futures investing, including ways to deal with risk.

Tuesday, November 16, 2010

Nuts and Bolts for Investors
By Chidem Kurdas

Just in time to meet the growing interest in managed futures, there's a new handbook for investors, High-Performance Managed Futures: The New Way to Diversify Your Portfolio by Mark Melin (Wiley, 2010). Below is a review and some highlights, in particular on how investors can control specific risks.

Mr. Melin is a director at PFG Best, a futures commission merchant. He's written and edited other books, including The Chicago Board of Trade Handbook of Futures and Options.

In the new book, he points out that assets have grown 700% in 10 years, yet managed futures remains something of a mystery to the investing public. "It is amazing that managed futures is one of the fastest growing asset classes and yet it remains relatively unknown and misunderstood," he says.

The book starts with an overview, which will be useful to beginner investors, and a description of the regulatory system. There is an excellent chapter on volatility, arguing that volatile but uncorrelated investments can be used to reduce the volatility of the overall portfolio - as pioneering research by Lintner and Markowitz showed.

Mr. Melin explains the managed futures account structure and how it protects investors, how to establish performance and risk targets and how to identify successful commodity trading advisors and construct a portfolio of them. He discusses reward-adjusted deviation, principal-protected investments and a variety of related subjects.

His opinions are a useful part of the discussion, though not everybody will agree with him on every topic.

Thus the chapter on risk not only lays out various hazards in managed futures investing but also Mr. Melin's useful comments on each and suggested ways of avoiding bad outcomes. He identifies three basic categories of risk, or choke points (Table 1). Of these, he sees individual manager risk as presenting the most significant problem.

TABLE 1

-----------------------------------------------------------------------------------------------------

Three Major Choke Points

Risk Comment How to Control
Unmonitored Margin and Leverage most common watch margin-to-equity ratio

Individual Manager

most significant avoid concentration
Fraud most preventable get segregated account

------------------------------------------------------------------------------------------------------

Source: High-Performance Managed Futures, discussion in chapter 11.

Individual manager risk is a catchall bucket that includes all decisions made by a CTA. It ranges from the time frame of trade execution to business operations. Mr. Melin occasionally describes this as unsupervised manager risk, but a CTA might have the wrong time frame for tracking a trend, for instance, and make a loss, no matter how carefully the clients watch their investments.

As he notes, the source of individual manager risk is concentration in a single CTA program or an undiversified portfolio of CTAs. Hence investing in a group of CTAs with diverse strategies and performance characteristics is the way to manage the risk. Mr. Melin compares multi-manager CTA portfolios to a single top-performing CTA to illustrate the power of diversification (Table 2). The drawdowns and risk-adjusted returns (Sharpe ratios) tell the story.

TABLE 2

-----------------------------------------------------------------------------------------------------------

Hypothetical Combinations of CTAs vs. Single CTA

Compounded Annual Return Worst Drawdown Sharpe Ratio
Conservative portfolio 7.7% 6.6% 0.85
Aggressive portfolio 35% 32% 1.02
Top CTA 22.6% 43% 0.43

------------------------------------------------------------------------------------------------------------

Source: High-Performance Managed Futures, p. 44.

Most of the writing in the book is clear and straightforward, if not very engaging. This is not light reading. It requires patience, attention to numbers and willingness to follow abstract arguments. A website, www.wiley.com/go/managedfutures contains much useful material and is to be updated regularly.

None of the points made in the book will surprise seasoned managed futures investors, but this wide-ranging primer should be a valuable resource for newcomers to the industry.



 
This article was published in Opalesque Futures Intelligence.
Opalesque Futures Intelligence
Opalesque Futures Intelligence
Opalesque Futures Intelligence
Today's Exclusives Today's Other Voices More Exclusives
Previous Opalesque Exclusives                                  
More Other Voices
Previous Other Voices                                               
Access Alternative Market Briefing


  • Top Forwarded
  • Top Tracked
  • Top Searched
  1. Other Voices: Same day reporting and the evolving role of fund administrators[more]

    By: Scott Price, Head of Business Development and Client Management for North America, Maitland Ernst & Young’s latest glob

  2. Activist News - Celgene says patent-fighting hedge fund manager wants to short its shares[more]

    From Reuters.com: Celgene Corp, one of the world's largest biotechnology companies, has accused U.S. hedge fund manager Kyle Bass of attempting to profit from his attempts to wipe out several major drug patents through his Coalition for Affordable Drugs. The company asked the U.S. Patent and T

  3. Einhorn's Greenlight Capital hedge fund slumps 6.1 percent in July[more]

    From Reuters/Thefiscaltimes.com: Hedge fund mogul David Einhorn's Greenlight Capital slumped 6.1 percent in July and is now down 9 percent for the year after gold, one of the fund's top holdings, tumbled to five-year lows last week. Greenlight notified clients of its returns late on Friday, ac

  4. Cowen Group, Inc. to acquire Conifer Securities[more]

    Cowen Group, Inc. and Conifer Securities, LLC had announced the signing of a definitive agreement under which Cowen will acquire Conifer Securities, the prime services division of Conifer Financial Services LLC. The transaction, the terms of which have not yet been disclosed, was approved by the boa

  5. Cargill’s Black River Asset to shut down four hedge funds[more]

    Komfie Manalo, Opalesque Asia: Cargill Inc.’s $7.4 billion Black River Asset Management said it was closing four hedge funds with a combined $ 1 billion in assets and start returning investors money over the next several months, various media said. The hedge funds represent 15% of Black River’

banner