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Commodity Trading Advisors: Risk, Performance Analysis, and Selection Chapter 10

CHAPTER 10 The Interdependence of Managed Futures Risk Measures. Practitioners today are faced with a wide choice of methods to measure return and risk in portfolios, either in absolute or relative terms. The Sharpe ratio, maximum drawdown, and semideviation are common examples. | 10 The Interdependence of Managed Futures Risk Measures Bhaswar Gupta and Manolis Chatiras Practitioners today are faced with a wide choice of methods to measure return and risk in portfolios either in absolute or relative terms. The Sharpe ratio maximum drawdown and semideviation are common examples. We classify 24 such measures into six groups and attempt to gauge how the measures interact by using data on five different CTA strategies. For each measure two groups of portfolios are created containing CTAs with the lowest and highest values of the measure. We find evidence of high correlation between the measures in some of the CTA strategies pointing to information overlaps and suggesting that some of these measures may be redundant. INTRODUCTION AND REVIEW OF THE LITERATURE The managed futures industry has grown from just under 1 billion in 1985 to more than 40 billion as of June 2003. This growth has led to closer scrutiny of the diversification properties as well as risk management of managed futures. The term managed futures represents an industry composed of professional money managers known as commodity trading advisors CTAs who manage client assets on a discretionary basis using global futures and options markets CISDM 2002 . The risks in managed futures are inherently more complex than traditional investments as they undergo rapid change over time. Hence a thorough understanding of the risks of the different market segments CTAs trade in is essential to effectively manage these risks. This chapter examines risk surrogates for certain CTA portfolios. The risks in the different market segments have been explored in several articles. Tomek and Peterson 2001 have reviewed risk management 203 204 RISK AND MANAGED FUTURES INVESTING practices in agricultural markets. Their review highlights gaps between concepts and implementation and notes that even though many well-developed models of price behavior exist appropriate characterization and estimation of .