The purpose of performance measurement in managed futures is quite clear. It is to establish from a statistical perspective how ‘good’, ‘bad’ or ‘indifferent’ the performance is of a particular trading adviser.

All performance analysis is a study of the historical track record and there can be no guarantee that whatever has been achieved in the past can be achieved again in the future. Gaining historical information itself is difficult in this industry because of its short history.

The objective of analysis is simply to get an indication of the likelihood and capability of an adviser of managing risk and generating returns. Performance measurement is usually based on a review of returns over the monthly, quarterly, semi-annual and annual figures. For more detailed study, there could also be an analysis of daily returns.

A word of caution: The results of analysis are dependent on the accuracy and quality of the performance figures, when proffered by the performer, as well as the measures used. This should be the easiest of the performance measurer’s problems to face but, inevitably, the quality of performance figures varies considerably.

Unresolved Issues in Measuring CTA Performance

The following is a list of unresolved issues connected with performance measurement for CTAs or managed futures funds. The questions raised should help an institutional investor approaching this market for the first time to focus on potential problems.

CTAs in the US who are registered as traders have to prepare their tables in a quasi ’standard format’ laid down by the CFTC. No such requirement exists for CTAs based in other parts of the world, including Europe, although EMFA, the European Managed Futures Association, is planning to address this problem. Until it does, the CFTC can register the performance of non-US CTAs. Many European CTAs take this route simply in order to gain that level of recognition of their performance and to attract the attention of US investors.

However, despite the semblance of order in the US, there are still some problems because not all traders conform to exactly the same column format in presenting their returns.

Interest Income

Meaden from TASS Management says:

Some include interest income in their performance results—others do not. All the money not used for either initial or variation margin will be sitting on deposit somewhere in T-Bills or some other short-term instruments. Some of those who include interest income in their results, charge management and/or performance fees on the interest earned. Others exclude interest income from the fees charged and only charge on the actual trading results.

Some traders report only in the six or seven column format, but actually include interest income which you do not see. Anyone analysing a number of track records should make sure that they know whether or not interest income is included.

Additions and Redemptions

Another problem for the potential performance measurer is the treatment ofcapital additions and/or withdrawals on a monthly basis. The CFTC regulations now include a further requirement that traders should time-weight the additionsand withdrawals. Meaden says:

If a trading adviser starts off with US$ 25m under management at the beginning of the month and receives an addition of US$ 10m during the course of the month, how and when should this US$ 10m be accounted for? Depending upon whether it is accounted for at the beginning or end of the month, or on a time-weighted basis throughout the month, the final monthly percentage rate of return figure will vary. The CFTC requires time weighting, but it is possible to use a number of accepted formulae

Fee-charging

The timing of fee-charging also presents difficulties. CTAs charge fees at different times. Incentive fees are usually charged quarterly in arrears. However, some CTAs charge management fees quarterly in advance and incentive fees quarterly in arrears. Others charge management fees quarterly in arrears, but accrue these fees on a monthly basis. Some charge management fees either monthly in advance or in arrears. There are no fixed rules on when exactly fees should be charged. The ideal solution is to strip out all fees to level the funds.

Gearing

The level of gearing in a fund is also a difficult thing to measure. Does the trading adviser’s record include accounts at different levels of gearing (for example, fully funded accounts versus accounts which are funded with notional equity)? If it does, is it important or is it more accurate to look only at the fully funded accounts? The regulators take this view, but the traders generally regard their tables, which include notional equity, as more representative of their performance.

Actual or simulated trading?

Does the performance by the CTA represent actual trading for client accounts? In recent years, some CTAs have extracted all the currency trades from a diversified portfolio and presented this currency ‘record’ as a separate currency trading program. The CTA should only present this as a separate table once he has solicited separate business to be managed specifically in the currency program.

Possibly related posts: (automatically generated)
Performance Measurement—The Issues

• Performance Measurement
• Evaluating Shorter Trader
• Common Terms Used in Measurement of Futures Funds
• Regulation of Managed Futures Funds in Europe Part 1
• THE REPORTING AND PERFORMANCE MEASUREMENT OF FINANCIAL FUTURES AND OPTIONS IN INVESTMENT PORTFOLIOS IN THE UK
• European Performance
• Managed Futures the Lintner Theory
• The Case Against Managed Futures
• Selecting a Baseline Measurement for CTA Success Part 1
• Common Performance Measurement Tools and Phrases