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Alternative Market Briefing

Factor-based analysis could better quantify CTA performance

Wednesday, August 12, 2015

Bailey McCann, Opalesque New York:

CTAs often cite risk management as a key to their success. Despite this claim, the process for evaluating CTA risk management has remained somewhat qualitative. A new white paper by Campbell & Company, Quantifying CTA Risk Management, attempts to quantify CTA risk management by defining four risk management factors: liquidity, correlation, volatility, and capacity.

The four risk management factors in the paper were applied to the Newedge Trend Index using the time period of March 2001 to May 2015.

According to Kathryn Kaminski, Phd, CAIA, Director, Investment Strategies at Campbell & Company, and author of the paper, "The index has significant positive exposure to three of the four risk management factors, especially correlation and capacity. For the correlation factor, this is consistent with CTA managers shifting risk in response to correlation across asset classes. For the capacity factor, this is consistent with CTA managers shifting risk in response to capacity constraints based on position limits. The risk management factors are then applied to a set of Managed Futures 40 Act mutual funds with daily returns from January 2014 to May 2015. In this sample set, many individual CTAs also hold significant loadings to the correlation and capacity risk management factors. The analysis in this paper demonstrates t......................

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