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Managed Futures NOT Synonymous with Commodities

April 5, 2016

Commodities Are Not CTAs

We spend a lot of time on the phone. It is how we connect with clients. We relish the opportunity to explain about managed futures and the potential benefits of diversification. Naturally, we wouldn’t be doing this if we didn’t believe in it!

Although many relate the two, managed futures is not synonymous with commodities. The misunderstanding is understandable. After all, the term Commodity Trading Advisor (CTA) does have the word “commodity” in it. And since commodities prices have been suffering, managed futures must be suffering, right?  Although these similarities may make it confusing, do not be fooled; Commodities are not the same as CTAs.

Chart courtesy of Bar Chart – S&P Goldman Sachs Commodity Index

Commodities Are Not CTAs

The Difference

Last August, we wrote about why Managed Futures would welcome back a time like 2008. The variety of markets and trading strategies for a CTA provide significantly more opportunity in trading decisions than someone merely buying in a basket of commodities. For example, CTAs may be selling options on bond futures, trading four-legged spreads on crude oil, or shorting the yen. So while a CTA may use commodity markets in their approach, they are vastly more flexible than a buy-and-hold approach to commodities.

Does this flexibility actually provide any measurable benefit?

Yes, while there is always risk in trading, we believe it does. Consider this VAMI chart comparing a Commodity Index to three different CTA Indexes. Note: These indices are not investable.

RICI = Rogers Int’l Commodity Index

AG CTA = Autumn Gold CTA Index

SG CTA = Societe Generale CTA Index

CS MF HF = Credit Suisse Managed Futures Hedge Fund Index

The truth is, historically, CTAs have had little correlation to a basket of commodity prices. Need more proof? Here are the actual correlation coefficients between the RICI, three CTA indices, and three individual CTAs. CTAs maintain a low, if not negative, correlation to commodities proper.

And while the individual performance of any individual CTA may differ from an index, both the indices and individual managers have a greatly different risk/reward profile compared to an index of commodities. In the table below, only the RICI has a small, negative CALMAR ratio. This points to not only negative returns but drawdowns in excess of those returns as well.

RICICalmar
RICI1.0000-0.40
Autumn Gold CTA Index0.24130.56
Credit Suisse Man Fut Hedge Fund Index0.11350.39
Societe Generale CTA Index0.06190.94
Red Rock Capital “Commodity Long/Short”-0.5043N/A
Goldenwise Capital “Quant MS”-0.11341.34
Wharton Capital “Agricultural Futures”-0.06032.06

 

All trading has risk, and CTAs are no exception. But the data above suggests that the recent long decline in commodity prices would not cause similar performance for CTAs. Instead, CTAs are able to function with low correlation to commodity price changes and with better recent performance anyways!

Consider using Managed Futures as a way to spread out the risk inherent in your investment portfolio. Contact your Alternative Investment Specialist to find more information about CTAs that show a promising risk/reward profile independent of stock, bonds and EVEN COMMODITIES themselves.

The risk of trading futures and options can be substantial. Trading foreign exchange carries a high degree of risk. Futures, Options and Forex may not be suitable for all investors. Consult your alt investment specialist for more information.

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The risk of trading futures and options can be substantial. Trading foreign exchange carries a high degree of risk, and may not be suitable for all investors. All information, publications, and reports, including this specific material, used and distributed by Foremost Capital Management shall be construed as a solicitation. Foremost Capital Management does not distribute research reports, employ research analysts, or maintain a research department as defined in CFTC Regulation 1.71. This website contains information obtained from sources believed to be reliable, but such information has not been independently verified and its accuracy is not guaranteed by Foremost Capital Management. Past performance is not necessarily indicative of future results. Any mention of performance in any context whether actual or hypothetical is no guarantee of future results. Phone calls to and from Foremost Capital Management or its DBAs may be recorded. Foremost Capital Management is a DBA of Foremost Trading, LLC. Your Privacy is important – Privacy Policy 2018.

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