DEMOGRAPHIC CHANGE AND AGEING POPULATIONS

In Europe as a whole, one of the greatest features of demographic change over the last century has been the dramatic increase in life expectancy. Currently, one third of the population of Europe is over 50 years old. For the financial industry, the result has been that the pension industry in particular is looking for more return on the capital it has under management.

With people generally living longer on less capital, actuaries within pension fund groups need to find routes for greater returns on money under management and many are more prepared to look at derivatives than they have been in the past. While many actuaries or pension consultants may consider looking towards derivatives for added returns the last action of desperate men, they are at least looking—which is a vast step forward.

For any manager of institutional money who is looking at either putting money into managed futures programmes, or at setting up a managed futures product for his company’s investors, one of the biggest problems is finding suitable traders and having found them, then evaluating their track records.

One of the principal problems with the managed futures industry, and one that reflects its immaturity, is the lack of standardisation of reporting requirements for CTAs. This makes the job of evaluating traders‘ performances, and picking out the good traders from the bad, even more difficult. This article is designed to help the investor new to the field to start the evaluation process.

Here are some simple pointers to bear in mind when attempting to evaluate CTAs:

THINGS TO LOOK FOR IN EVALUATING EXISTING CTAS

1. Duration of track record—what time period does the track record represent? Check that it hasn’t been backdated to produce what is actually a simulated track record.
2. Is the track record audited, and if so, by whom? Does the auditor have a good knowledge of the derivatives markets? It is possible to blind an accountant with science in this industry? When are profits and losses realised? How often are the accountants, or at least a third party, preparing the accounts?
3. Is the CTA showing the track records of all his trades? A potential institutional investor needs to see the good, the bad and the ugly in a CTA’s trading history. Check the CTA’s brokers’ statements.
4. Is the performance of the trader consistent with his or her’s methodology and market conditions. For instance, if the trader claims to be a trend-follower, how has he or she performed during a period when the markets were trending very strongly? It can also be useful to compare traders with their peers.
5. Infrastructure—does the trader have the administrative back-up and experience to cope with the size of money under management that he or she already has and that which he or she may have after new investment? For some investors, particularly those that are from a pension fund background, the ‘after-sales service’ may be equally as important as the trader’s investment performance because of fiduciary responsibilities for the money.
6. Regulation—how is the trader regulated and is it to an appropriate level, given his or her geographical location? Does the trader belong to, or take an active role in, any trade associations?
7. Are the trader’s achievements dependent on the amount of money under management? Some traders have systems that cannot cope with trading a lot of money. Industry experts estimate that from US$ 5m to US$ 80m under management, traders run a big risk of ‘blowing up’ and losing performance. One way of limiting the chance of this happening in a trader to whom an investor gives money is to look at .. .
8. . . . Pedigree—this is probably the most important factor to take into consideration when evaluating existing CTAs. Does the CTA have a background where he or she is used to trading money and particularly used to trading a large amount of money? A phenomenon of the European emerging CTA community is that most have an institutional background —in fact most come out of the banks. These traders are used to trading larger amounts of money and are more professional in their approach to matters such as administration and record keeping.

Beyond these points, methods such as calling for spot audits on a trader’s performance record and the completion of due diligence tests should help in compiling a profile. However, evaluating new and rising traders is a more difficult proposition altogether.

Possibly related posts: (automatically generated)
Finding and Evaluating Trading Advisers Part 1

• Finding and Evaluating Trading Advisers Part 2
• Finding and Evaluating Trading Advisers Part 3
• Common Terms Used in Measurement of Futures Funds
• Regulation of Managed Futures Funds in the US and Japan
• Regulation of Managed Futures Funds in the US and Japan
• Evaluating Shorter Trader
• The Evolution of Managed Futures Funds
• Where Do You Look for the Next Paul Tudor Jones? Part 2
• The Simple Managed Futures Trading Regulatory Recourse
• Managed Futures Paperwork and Other Regulatory Matters