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Opalesque Futures Intelligence

Inaugural Altegris CTA Challenge Entering Final Stage

Thursday, November 21, 2013

By Mark Melin

As the inaugural Altegris CTA Challenge heads for a December close, and the managed futures industry again experienced among the more significantly negative market environments for price persistence in history, a trend follower with a counter-trend model handily leads the race by several lengths.

Mehnert is known to have what he refers to as a money management algorithm, a systematic method to consider position sizing based on items such as VaR and exit trade strategies.

Mehnert Capital Management's program is a rare shining star, up 21.73% while the Altegris CTA index is down 4.05% year to date. R.J. Mehnert has a professional trading background working for eight years with a partner in a previous CTAprior to moving out on his own. Why is Mehnert up significantly while the industry has been struggling in general? While few traders provide complete details into their secret sauce, Mehnert is known to have what he refers to as a money management algorithm, a systematic method to consider position sizing based on items such as VaR and exit trade strategies. This along with some of his counter trend strategies might explain why he performed positively in May (+6.76%) and June (+4.55%), periods of time when traditional managed futures trend following programs were caught in trend reversals that hit large financial markets, resulting in losses in the Altegris 40 index for May (-4.30%) and June (-3.79%).

"Every CTA does something different," Altegris Clearing Solutions Maxwell Eagye noted. "Most CTA systems are derived from trade ideas that come from individuals. Even though we have a lot of global diversified trend followers in the CTA Challenge, within that group there is a lot of diversification in time frames, sectors and other things. The CTA Challenge was designed to provide knowledge to investors. Getting a research analyst involved can take a lot of effort and a lot of resources. We wanted to develop a more systematic way to at least do an initial vetting using technology and evaluate CTAs on a systematic basis."

In order to score the managers, the CTA Challenge considers seven factors in a formula:

  • Daily Rate of Return vs. Daily Volatility [Sharpe Ratio without Risk-Free rate]
  • Daily Rate of Return vs. Daily Downside Volatility [Sortino Ratio without Risk-Free rate]
  • Daily Rate of Return vs. Maximum Daily Drawdown [Sterling Ratio without Risk-Free rate]
  • Daily Rate of Return vs. DailyMargin-to-Equity [Return on Margin]
  • Daily Rate of Return vs. Daily Value at Risk (VAR) [Return on VaR]
  • Daily Rate of Return vs. Daily Conditional Value at Risk (CVAR) [Return on CVaR]
  • Total Rate of Return during the period of the challenge

"Risk control is important," noted Eagye. "The old adage that anything that can go up 50% can go down 50% can be true...just look at the Nasdaq Composite during the Dot Com bubble and subsequent Tech Wreck from 1997 to 2001. We want to make sure that while managers can make money they can also manage risk in market environments that are not favorable to their strategy as a way to preserve capital."

Portfolio Diversification

The CTA Challenge should not be used as a tool for an investor to select the "best" manager, but rather to provide CTA exposure to obtain diversification. "The reason we build diversified portfolios and why we never hold out a single manager is that certain managers succeed in certain market conditions while other managers may not," Eagye said.

2100 Xenon's Long Short Global Fixed Income program, which is entered into the CTA Challenge, is a good example. The strategy is designed to benefit during periods of rising interest rates. When interest rates along the yield curve jumped in May and June the program performed positively, but as market trends along the yield curve remain artificially suppressed investing in the program has been more an exercise of watching their risk controls during periods of negative market environments. "The diversification concept is that in a time of need a diversified manager like Xenon could pull up performance of a portfolio when other CTAs falter."

Eagye notes the primary goal of the CTA Challenge is to provide a platform for small and medium sized managers to displaytheir prowess. "In many cases a manager with $100 million under management can more effectively enter and exit markets than can a CTA with larger assets under management."

The AltegrisCTA Challenge 2013 ends in December with an awards dinner scheduled for January 2014. Visit for more information.

This article was published in Opalesque Futures Intelligence.
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