5.2 Macro & Managed Futures Funds

Question 1

Shared traits of macro and managed futures funds?

Answer 1

1) greater liquidity

2) greater capacity

3) lower counterparty risk

Question 2

Discretionary fund trading?

Answer 2

• Decisions made using judgment, information from models, and data analysis.
• Used more by global macro funds

Question 3

Systematic fund trading (black-box model trading)?

Answer 3

• Decisions made based on results of models. Systematic managers use systematic process to identify trades - do not constantly evaluate trades before implementing them.
• Used more by managed futures funds.

Question 4

Who uses fundamental analysis?

Answer 4

Global macro funds

Question 5

Who uses technical analysis?

Answer 5

Managed futures funds

Question 6

Global macro trading key characteristics

Answer 6

• macro price moves or inefficiencies
• long / short
• lack of investment focus (any instrument)
• tend not to invest in equity markets
• large amounts of capital and leverage
• low return correlation with stock, bonds, other HF

Question 7

4 examples of global macro strategies

Answer 7

1) foreign exchange

2) sovereign bonds

3) based on economic policy

4) thematic investing (secular & long term changes

Question 8

Market microstructure

Answer 8

Study of trading mechanisms, including costs associated with transactions and behavior of bid and ask prices

Question 9

Global Macro Investing - Risks

Answer 9

1. Market risk - directional moves in general market prices.
2. Event risk - unexpected change in market conditions due to specific event.
3. Leverage risk - using leverage through prime brokers or via derivatives.
   • Greater in single securities sourced via prime brokers than in derivatives.

Question 10

History of futures trading?

Answer 10

Futures contracts were developed in the 1800s in agricultural markets, providing cost-effective vehicles to transfer and manage risk associated with uncertain crop prices.

The first public commodity futures fund was established in 1948, trading primarily in agricultural commodity futures, and remained active until the 1960s.

Financial futures contracts emerged in the 1970s, providing market participants vehicles with which to transfer and manage various financial risks (e.g., market, interest rate, exchange rate, and credit risks). The growth of the financial futures market resulted in further development of the managed futures industry.

Question 11

Goal of managed futures funds? How is it achieved?

Answer 11

Generate consistent positive returns

Long and short positions in futures

Question 12

Key features of managed futures funds?

Answer 12

Implemented by COMMODITY TRADING ADVISERS (CTAs)

•Trades in various markets, thus provides access to several asset classes.

•Liquid (when using futures) and can readily go long or short.

• Uses leverage (directly via margin or indirectly via using futures).

•Provide risk-return patterns not easily accessible using traditional assets or other alternatives (e.g., hedge funds).

Question 13

How can investors access MF?

Answer 13

Via:

1) futures trading funds (managed account or fund)

2) commodity pools managed by commodity pool operators (CPOs), who invest in several CTAs

Question 14

Futurization of OTC Contracts

Answer 14

OTC contracts have changed to multi-lateral clearing of futures

Clearing house takes the offsetting position

Question 15

Key regulation dates in macro funds?

Answer 15

Commodity Futures Trading Commission CFTC [1974] - federal regulatory agency for all futures & derivatives trading;

1974 - Commodity Exchange Act (CEA)

National Futures Association (NF4) [1982] - independent industry-supported self-regulatory body.

Question 16

Managed account pros

Answer 16

1) Tailored to investor preferences.

2) Investor retains custody of assets with broker (only allow PO/CIA to trade).

3) Provide transparency and investor control.

Question 17

Systematic trading depends on?

Answer 17

Derive Trading rules by using back tests, which depend on:

Success of backtests depends on -
1. No data dredging (misusing tests to identify patterns).
2. Estimating slippage (difference between assumed & actual entry/exit prices).
3. Using executable, error-free prices.

Question 18

Questions to ask when evaluating a systematic trading system

Answer 18

1. What is the trading system; how was it developed?
2. Why & when is the trading system successful/unsuccessful?
3. How is the trading system executed?

Question 19

How is validation of systematic trade system is done?

Answer 19

Using out of sample data

Question 20

Trading rules in systematic trading systems generally DEGRADE over time, how should differentiate between them?

Answer 20

1) effective trading systems that are changed to improve pattern detection

2) degraded systems that are data dredging for patterns that no longer exist.

Question 21

Processes that don’t follow random walk?

Answer 21

1) Mean-reverting prices - move towards long-run average; exhibit negative autocorrelation.

2) Momentum (opposite of mean-reversion) - price moves followed by moves in same direction; exhibits positive autocorrelation.

Question 22

3 types of systematic trading strategies

Answer 22

1) trend following

2) non trend following

3) relative value

Question 23

Trend following strategies?

Answer 23

1) moving average (average price over a number of days)

2) break out

Question 24

Moving average strategy trading rules

Answer 24

Buy when current price moves above MVA.

Sell when current price moves below MVA.

Buy (sell) when shorter-term MVA crosses up over (below) long-term MVA.

Buy (sell) when set of MVAs all move upward (down).

Question 25

National Futures Association (NFA)

Answer 25

industry supported, independent self regulalory body that provides educational services futures industry