Towards transparency
in CTA's
CAIA Switzerland Educational Event
Zurich, April 2014
Agenda
Why invest in trends? The well known reasons
Why invest in trends? The case dependent on the holding period a different perspective
Inside a CTA machine: Overview of the working engines
Inside a CTA machine: Trend measurement and trend selection
Inside a CTA machine: Risk engine for portfolio construction
The performance sources, recent results and a peer group analysis
Towards transparency summary
1741 Asset Management AG company portrait
Well documented basis for trend investing
Rational
Beliefs
• Investors have different and time varying beliefs that reflect different
levels of optimism and pessimism
• That can cause mid- to long term trends in financial markets. For
instance long term bull and bear market cycles
Market –
inefficiency
• Investors have different time lags to consider information for their
investments that can cause midterm trends. For instance delayed
reaction for financial result warnings
Herding
• Investors influence each other through exchanging information and
opinions that can cause or intensify trends in financial series. For
instance the dotcom bubble
3
Performance and diversification is key
•
Outstanding diversification characteristics
• Attractive risk-adjusted return
in the long term

Low and asymmetric correlation to traditional asset classes

Low correlation to alternative investment strategies and positive skew
of returns
Monthly data for period December 1986 to March 2013 based on Barclay US Managed Futures Industry BTOP 50 index (BARCBTOP), Citigroup WGBI All Maturities USD
(SBWGU), MSCI TR Gross World (GDDUWI) and S&P GSCI Official Close Index TR (SPGCCITR) indices, HFRI (FoF: HFRIFOF, equity market neutral:
HFRIEMNI, emerging markets: HFRIEM, equity hedge: HFRIEHI, event-driven: HFRIEDI, relative value: HFRIRVA) indices.
Data and research from 1741 Asset Management research note series: How managed futures manage the future (www.1741am.com)
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Agenda
Why invest in trends? The well known reasons
Why invest in trends? The case dependent on the holding period a different perspective
Inside a CTA machine: Overview of the working engines
Inside a CTA machine: Trend measurement and trend selection
Inside a CTA machine: Risk engine for portfolio construction
The performance sources, recent results and a peer group analysis
Towards transparency summary
1741 Asset Management AG company portrait
Opportunity set for trend investing depends on the
holding period
Percentage of winning and losing investments dependent on fixed holding period
20000
Finding 1:
winning
The longer the holding
period the more winning
opportunities are seen on
10000
the long side
losing
0
Either one focus on long
only strategies or apply
-10000
5 days
1 month
6 months
1 year
5 years
10 years
a strategy, that based
on particular measures
Finding 2: A holding period between 1 month and a year offers
opportunities on the long and the short side
Source: Bloomberg, daily data, since 1927, 1741 Asset management AG analysis
gives signals for going
long or short with a
holding period between
1 month or 1 year
6
At which length of holding period does a CTA begin
to pay-off, compared to long only?
1
Percentage of winning and losing investments dependent on fixed holding period
SPX since 1927 positive
SPX since 1992 positive
CTA since 1992 positive
Active, dynamic
allocations according
to trends start to
1
pay-off after a
holding period of at
least 6 months
0
1 Tag
5 Tage
1 Monat
6 Monate
CTA: Commodity Trading Advisor
Source: Bloomberg, daily data, since 1927, 1741 Asset management AG analysis
CTA: simulated results, 1741 Asset management AG analysis
1 Jahr
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Agenda
Why invest in trends? The well known reasons
Why invest in trends? The case dependent on the holding period a different perspective
Inside a CTA machine: Overview of the working engines
Inside a CTA machine: Trend measurement and trend selection
Inside a CTA machine: Risk engine for portfolio construction
The performance sources, recent results and a peer group analysis
Towards transparency summary
1741 Asset Management AG company portrait
1741 representative fund overview of the engines
Signal engine
Risk engine
Medium and long term focus on trends
Trend comparison
Trend measurement
Digital signal processing
Sequential statistics
Measurement
• MT: 1m to 6m
• LT: 1yr to 1.5yrs
Short term focus on risk
Trend selection
Statistical methodologies
Comparison
• Historical comparison
Selection
• Response function
Capital allocation
Risk equalisation methodologies
Allocation
• Continuous statistical
identifies path of the
prescribes trend
assessment applies two risk
trend
characteristics to
measures to balance the
portfolio weights
asset classes and
• Cross-sectional
comparison reflects
instruments to a constant
intra-asset class
risk level
relationship
9
The universe of traded instruments: The more
instruments the better …
FX (30)
Equity (19)
Bond (11)
STIR (8)
Commodity (28)
EM/G10
G10/G10
Europe
North America
Asia Pacific
Europe
North America
Asia Pacific
Europe
North America
Asia Pacific
Energy
Metal
Livestock / Soft
BRLUSD
CZKEUR
HUFEUR
ILSUSD
KRWUSD
MXNUSD
PLNEUR
RUBUSD
ZARUSD
AUDCAD
AUDJPY
AUDUSD
CADUSD
CADJPY
CHFJPY
CHFUSD
EURAUD
EURCAD
EURCHF
EURGBP
EURJPY
EURSEK
EURUSD
GBPCHF
GBPJPY
GBPUSD
JPYUSD
NOKUSD
NZDUSD
AEX
CAC40
DAX
IBEX 35
EURO STOXX 50
FTSE / MIB
FTSE 100
OMXS30
SMI
DJIA
MSCI Taiwan
NASDAQ 100
S&P / TSX 60 IX
S&P 500
S&P MID 400
H-SHARES
HANG SENG
Nikkei 225
TOPIX
EURO 10Yr BUND
EURO 2Yr Schatz
EURO 30Yr BUXL
EURO 5Yr BOBL
GB 10Yr Long Gilt
US 10Yr Note
US 2Yr Note
US 30Yr Long Bond
US 5Yr Note
CAN 10Yr Bond
JPY 10Yr Bond
AUD 90Day Bank Bill
CAD 90Day Bank Accept
EURIBOR 90Day
EuroChf 90Day
EuroDollar 90Day
EuroYen 90Day
Fed Fund 30Day
GB 90Day Sterling
Brent Crude
Gas Oil
Gasoline
Heating Oil
Natural Gas
Natural Gas ICE
WTI Crude
Cattle Feeder
Lean Hogs
Live Cattle
Aluminium LME
Copper
Gold
Palladium
Platinum
Silver
Zinc LME
Cocoa
Coffee C
Corn
Cotton No 2
Rapeseed
Soybean
Soybean Meal
Soybean Oil
Sugar No 11
Wheat CBT
Wheat LIFFE
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Agenda
Why invest in trends? The well known reasons
Why invest in trends? The case dependent on the holding period a different perspective
Inside a CTA machine: Overview of the working engines
Inside a CTA machine: Trend measurement and trend selection
Inside a CTA machine: Risk engine for portfolio construction
The performance sources, recent results and a peer group analysis
Towards transparency summary
1741 Asset Management AG company portrait
Trend measurement an engineering challenge
Signal engine
Medium and long term focus on trends
Medium-term
1600
For illustrative purposes only
1400
Precision
of trend
measurement
is key
•
Medium term trend models focus on precision
1200
•
The inertia of trend changes overcomes the time
accuracy
1000
•
The precision is crucial for the measurements
quality
800
600
2007
SPX Index
2008
SMA(100)
2009
SMA(200)
2010
Low - Switch
1600
For illustrative purposes only
Long-term
1400
Time accuracy
of trend
measurement
is key
•
Long term trend models focus on reactiveness
•
A year of data enables for high level of precision
in the measurement
•
A delay in signal change is crucial for the trend
measurement
1200
1000
Quick change point
detection
800
Switch
600
2007
2008
2009
SPX Index
2010
12
Another decision: Trend selection shapes the strategy
profile
Signal engine
Medium-term
Medium and long term focus on trends
Which trends
are preferred?
•
Emphasis on frequently occurring normal trends
•
Models capture extraordinary and rare trends with reduced
position size
Why are these trends
preferred?
•
A detailed statistical assessment revealed an obvious
picture
•
Increased stable behaviour in different market
environments
•
Gradually build positions, reducing exposure if trends
become too extreme and odds deteriorate
Mimicking a prudent
trader
Trend strength
Position size
Illustrative purposes only
Long-term
Trend strength
Which trends
are preferred?
•
Long term trend measurement do not tend to be extreme
based on the measurement reactiveness. The trailing
behaviour of the measurement reduces the extremes
Why are these trends
preferred?
•
A detailed statistical assessment revealed an obvious
picture
Go with the trend
•
Gradually build positions with the increments of the
signal
Position size
Illustrative purposes only
13
Agenda
Why invest in trends? The well known reasons
Why invest in trends? The case dependent on the holding period a different perspective
Inside a CTA machine: Overview of the working engines
Inside a CTA machine: Trend measurement and trend selection
Inside a CTA machine: Risk engine for portfolio construction
The performance sources, recent results and a peer group analysis
Towards transparency summary
1741 Asset Management AG company portrait
Focus on portfolio construction: Including risk
measures to balance the holdings and portfolio
Risk engine
Short term focus on risk
Many roads lead to Rome and there are many methods to achieve a balanced
risk based portfolio construction
• Risk budgeting as the general methodology of risk parity
• Mean Variance Optimization the classical approach
• Maximum Diversification a new and promising methodology
• Individualized risk techniques such as volatility filters, stop losses et al.
Choose one, two, all or none ?
15
Risk parity in detail as one solution for the portfolio
construction
Risk engine
Short term focus on risk
Equal contributions using a multi-dimensional risk measure:
Multi-dimensional risk focus
•
Risk weights for 96 instruments given same
signal strength
The risk equalisation approach starts with
analysing the riskiness of each
STIR
Equity
Equity
instrument according to volatility and
asymmetric volatility
•
Commodity
It aims at weighting the instruments such
that each contributes the same amount of
risk to the total portfolio risk
•
FX
As a consequence, risk is balanced across
the portfolio
FX
Bonds
Bond
STIR
Commodity
For illustrative purposes only
16
The risk attributions of the outcome in the long term:
Balanced and controlled
Crops
14%
FX
21%
Precious Metals
7%
Base Metals
4%
Livestock
5%
Equity Indices
18%
Energies
8%
Interest Rates
1%
Bonds
22%
Source: 1741 Asset Management , long term risk contribution based on historic volatilities / profit and loss since September 2009
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Agenda
Why invest in trends? The well known reasons
Why invest in trends? The case dependent on the holding period a different perspective
Inside a CTA machine: Overview of the working engines
Inside a CTA machine: Trend measurement and trend selection
Inside a CTA machine: Risk engine for portfolio construction
The performance sources, recent results and a peer group analysis
Towards transparency summary
1741 Asset Management AG company portrait
At the end of the day the two sides of the momentum
risk premium differ: The long and the short of it!
•
The long side of momentum risk premium investing
obviously collects the equity growth carry, the fixed
income carry, the foreign exchange carry and the
supply-demand commodities carry
•
The short side of momentum risk premium
investing collects the long-volatility spike pay-off.
Hedging and diversifying the long side of the
strategy and pronouncing the diversification and
asymmetric return characteristic of a CTA to other
asset classes
Source: 1741 Asset Management AG internal backtest gross returns 1994 till 2014
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1741 representative fund vs. peers on a volatility
adjusted basis
Cumulative return
20.0%
15.0%
10.0%
5.0%
0.0%
-5.0%
-10.0%
-15.0%
Newedge
Winton
MAN AHL
Aspect
Transtrend
Lynx
Equal weighted competitors
DivTrend
Bloomberg; 1741 Diversified Trends (WSDIVTE LX Equity), Newegdge CTA Trend Following Index (NEIXCTAT Index), Winton (INNWNTN MV Equity), MAN AHL (ADFDGLI ID
Equity), Asprect (ALTWELL MV Equity), Transtrend (ALTTRAN MV Equity), Lynx (DBPIVLX LX Equity)
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Agenda
Why invest in trends? The well known reasons
Why invest in trends? The case dependent on the holding period a different perspective
Inside a CTA machine: Overview of the working engines
Inside a CTA machine: Trend measurement and trend selection
Inside a CTA machine: Risk engine for portfolio construction
The performance sources, recent results and a peer group analysis
Towards transparency summary
1741 Asset Management AG company portrait
Shining light into the black box
•
The awareness rises that CTA's harvest the momentum risk premium on different time
horizons combined with a risk based Asset Allocation
•
CTA's cover the opportunity set in the market that is not accessed by typical long only
strategies
•
A CTA payoff profile is heavenly dependent on the trend type that the model selects
•
The profitability of the momentum risk premium is cyclical by nature with a long
volatility tendency
•
The short exposure of a CTA delivers the long volatility insurance aspect as the long
side harvest the long only risk premium with a positive momentum
22
Agenda
Why invest in trends? The well known reasons
Why invest in trends? The case dependent on the holding period a different perspective
Inside a CTA machine: Overview of the working engines
Inside a CTA machine: Trend measurement and trend selection
Inside a CTA machine: Risk engine for portfolio construction
The performance sources, recent results and a peer group analysis
Towards transparency summary
1741 Asset Management AG company portrait
1741 Asset Management AG a quantitative pioneer
Alternative Indexing
•
•
Independent alternative indexing specialist with 13+ years
Managed Futures
•
Independent managed futures specialist with over four
of track record in research and index construction
years experience in research and state of the art
Focused on the application of innovative index weighting
methodologies
methodologies and the identification of systematic factors
•
Focused on innovative methodologies in risk based portfolio
weightings and systematic pure trend following
affecting the investment's risk/return profile
•
•
Internal research team in the area of alternative indexing.
trend following. Close collaboration with ETH and UNISG
Close collaboration with ETH and UNISG
•
Internal research team in the area of risk allocation and
Leading research provider in the field of alternative
•
Over 1 bn. EUR AuM
indexing
•
Leading provider of managed futures products


Various publications in many periodicals and peer-

6 HFM nominations
reviewed journals

2 HFM Awards
William F. Sharpe Award winner**

1 Mondo Alternative Award

5 Star rated by Morningstar: 1741 Global Risk
Diversification

Citywire AAA rated Fund Manager
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Disclaimer
The information provided are issued by 1741 Asset Management Ltd. ("1741 AM"), a Swiss registered fund management company having the form of a limited company and
supervised by the Swiss Financial Market Supervisory Authority and may not be reproduced or disseminated in whole or in part without permission from 1741 AM. Information
contained herein is for information purposes only and is intended only for the person or entity to which it is addressed. Historical data should not be taken as an indication or
guarantee of any future performance. Index returns are no guarantee for any returns of financial products linked to the index. All performance shown prior to the index inception
date is back-tested performance. Back-tested data may reflect the application of the index methodology with the benefit of hindsight, and the historic calculations of an index may
change from month to month based on revision to the underlying economic data used in the calculation of the index. Any unauthorized use of this information by any person or
entity is prohibited. The information contained herein may be changed any time and without prior notice. Although the information provided is believed to be materially correct, no
representation or warranty is given as to the accuracy of any of the information provided. The information in this document does not constitute tax, legal or investment advise and
is not intended as a recommendation. 1741 AM, their directors, officers and employees do not accept any liability whatsoever for any loss or damage arising from use of
information contained herein.
Contact:
1741 Asset Management Ltd
Münsterhof 5
8001 Zürich
info@1741am.com
+41 58 458 48 00
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