CAIA - 25 - Managed Futures

Question 1

Professional managed futures money managers are referred to as ___ ___ ___ (CTAs).

Answer 1

Professional managed futures money managers are referred to as commodity trading advisers (CTAs).

Question 2

Investors can access the managed futures industry by investing in a futures trading fund or commodity pool that is managed by a ___ ___ ___, who invests in several CTAs.

Answer 2

Investors can access the managed futures industry by investing in a futures trading fund or commodity pool that is managed by a commodity pool operator, who invests in several CTAs.

Question 3

The ___ ___ ___ ___ was created in 1974 as a federal regulatory agency for all futures and derivatives trading.

Answer 3

The commodity futures trading commission (CFTC) was created in 1974 as a federal regulatory agency for all futures and derivatives trading.

Question 4

The ___ ___ ___ was created in 1982 and is an independent industry-supported self-regulatory body. It is a supplement to the CFTC.

Answer 4

The national futures association (NFA) was created in 1982 and is an independent industry-supported self-regulatory body. It is a supplement to the CFTC.

Question 5

Regulation of the foreign exchange futures market has increased since 2008. Many bilateral contracts have changed to a multi-lateral cleared structure and is referred to as the ___ of OTC contracts.

Answer 5

Regulation of the foreign exchange futures market has increased since 2008. Many bilateral contracts have changed to a multi-lateral cleared structure and is referred to as the futurization of OTC contracts.

Question 6

Managed futures strategies can be classified in four core dimensions:

1. D___ ___
2. I___ ___
3. T___ ___
4. S___ ___

Answer 6

Managed futures strategies can be classified in four core dimensions:

1. Data Sources

2. Implementation Style

3. Time Horizon

4. Strategy Focus

Question 7

Managed futures strategies can be classified as ___ or ___based on their data source.

Answer 7

Managed futures strategies can be classified as fundamental or technical based on their data source.

Question 8

___ strategies use data such as economic forecasts and supply and demand estimates.

Answer 8

Fundamental strategies use data such as economic forecasts and supply and demand estimates.

Question 9

___ strategies use historical prices and volume data.

Answer 9

Technical strategies use historical prices and volume data.

Question 10

Managed futures implementation styles are classified as ___ or ___.

Answer 10

Managed futures implementation styles are classified as systematic or discretionary.

Question 11

___ strategies use rules based on quantitative models that identify entry and exit positions, position scaling, and position size.

Answer 11

Systematic strategies use rules based on quantitative models that identify entry and exit positions, position scaling, and position size.

Question 12

___ strategies aim to capture market driven price opportunities with the trading decision being made by the fund manager.

Answer 12

Discretionary strategies aim to capture market driven price opportunities with the trading decision being made by the fund manager.

Question 13

Discretionary strategies are typically ___ diversified than systematic traders.

Answer 13

Discretionary strategies are typically less diversified than systematic traders.

Question 14

Many discretionary managers (do/do not) use quant models to determine positions.

Answer 14

Many discretionary managers do use quant models to determine positions.

Question 15

High frequency trading strategies (are/are not) typically classified as managed futures strategies.

Answer 15

High frequency trading strategies are not typically classified as managed futures strategies.

Question 16

Short-term strategies are typically held intraday to ___ month(s). Medium-term strategies are typically held ___-___ months and long-term strategies are typically held longer than ___ months.

Answer 16

Short-term strategies are typically held intraday to 1 month(s). Medium-term strategies are typically held 1-6 months and long-term strategies are typically held longer than 6 months.

Question 17

Mean reversion and countertrend strategies are typically ___ term, where trend-following are often ___or ___term strategies. ___funds generally combine several approaches.

Answer 17

Mean reversion and countertrend strategies are typically shorter term, where trend-following are often medium or longer term strategies. Systematic funds generally combine several approaches.

Question 18

There are a number of key issues associated with dynamic futures trading strategies:

1. T___ ___
2. T___ ___
3. S___

Answer 18

There are a number of key issues associated with dynamic futures trading strategies:

1. Transaction Costs

2. Trading Capacity

3. Slippage

Question 19

___ refers to performance deviating from expected trading results based on a model’s signal.

Answer 19

Slippage refers to performance deviating from expected trading results based on a model’s signal.

Question 20

Some of the more common strategy focuses for managed futures are:

1. M___
2. M___ ___
3. G___ ___
4. R___ ___
5. C___ ___
6. M___-___

Answer 20

Some of the more common strategy focuses for managed futures are:

1. Momentum

2. Mean reversion

3. Global macro

4. Relative Value

5. Carry trading

6. Multi-strategy

Question 21

___ refers to the rate at which a security’s price changes

Answer 21

Momentum refers to the rate at which a security’s price changes

Question 22

A ___-___momentum strategy would buy outperforming assets and sell underperforming assets.

Answer 22

A cross-sectional momentum strategy would buy outperforming assets and sell underperforming assets.

Question 23

In futures markets, ___-___momentum strategies are typically implemented, which go long and short futures markets across time and asset classes.

Answer 23

In futures markets, time-series momentum strategies are typically implemented, which go long and short futures markets across time and asset classes.

Question 24

Moving average and breakout strategies are two strategies used to generate ___ ___.

Answer 24

Moving average and breakout strategies are two strategies used to generate trading signals.

Question 25

A ___ \_\_\_ ___ strategy establishes signals based on MVAs over different look-back periods.

Answer 25

A **moving** **average crossover** strategy establishes signals based on MVAs over different look-back periods.

Question 26

\_\_\_ strategies generate trend signals when a price breaks out of a range of past values, referred to as ___ \_\_\_ and ___ \_\_\_.

Answer 26

**Breakout** strategies generate trend signals when a price breaks out of a range of past values, referred to as **resistance levels** and **support levels**.

Question 27

A breakout strategy position is exited when an opposite breakout trend signal is generated or when a ___ \_\_\_is reached.

Answer 27

A breakout strategy position is exited when an opposite breakout trend signal is generated or when a **trailing stop** is reached.

Question 28

A ___ \_\_\_is a trade order that specifies a stop-loss price as a % or dollar amount below a price.

Answer 28

A **trailing stop** is a trade order that specifies a stop-loss price as a % or dollar amount below a price.

Question 29

\_\_\_ \_\_\_managed futures strategies are discretionary strategies that identify and take long and short positions in various futures markets based on fundamental data.

Answer 29

**Global macro** managed futures strategies are discretionary strategies that identify and take long and short positions in various futures markets based on fundamental data.

Question 30

Fundamental based global macro strategies enter trends ___ than trend-following strategies.

Answer 30

Fundamental based global macro strategies enter trends **earlier** than trend-following strategies.

Question 31

\_\_\_ ___ managed futures strategies aim to identify relative mispricings between different assets across time or markets.

Answer 31

**Relative value** managed futures strategies aim to identify relative mispricings between different assets across time or markets.

Question 32

Mean-reversion strategies are typically \_\_\_-term strategies and trend-following strategies are more \_\_\_term.

Answer 32

Mean-reversion strategies are typically **short**-term strategies and trend-following strategies are more **long** term.

Question 33

The ___ form of the efficient market hypothesis maintains that all historical information is incorporated in prices, which implies that historical prices cannot be used to make profitable investments.

Answer 33

The **weak** form of the efficient market hypothesis maintains that all historical information is incorporated in prices, which implies that historical prices cannot be used to make profitable investments.

Question 34

The ___ form of the efficient market hypothesis maintains that all relevant information is incorporated in prices.

Answer 34

The **strong** form of the efficient market hypothesis maintains that all relevant information is incorporated in prices.

Question 35

The efficient markets hypothesis (may/may not) be the best framework for understanding managed futures strategies.

Answer 35

The efficient markets hypothesis **may not** be the best framework for understanding managed futures strategies.

Question 36

The ___ \_\_\_ \_\_\_is an approach that explains the evolution of markets based on principles of evolutionary biology, where market dynamics are driven by competition, mutation, reproduction, and natural selection.

Answer 36

The **adaptive markets hypothesis** is an approach that explains the evolution of markets based on principles of evolutionary biology, where market dynamics are driven by competition, mutation, reproduction, and natural selection.

Question 37

There are 4 key practical implications of an adaptive view on markets: 1. \_\_\_-\_\_\_risk premiums 2. Market efficiency is \_\_\_ 3. Adapting for \_\_\_and \_\_\_ 4. Inevitable degradation of \_\_\_

Answer 37

There are 4 key practical implications of an adaptive view on markets: 1. **Time**-**varying** risk premiums 2. Market efficiency is **relative** 3. Adapting for **success** and **survival** 4. Inevitable degradation of **alpha**

Question 38

In financial markets, ___ may be described as the evolutionary tendency or process by which the market ecology evolves in response to changes in the economy.

Answer 38

In financial markets, **divergence** may be described as the evolutionary tendency or process by which the market ecology evolves in response to changes in the economy.

Question 39

\_\_\_\_ refers to prices moving away from their no-arbitrage levels as a result of slow or lengthy periods of divergence

Answer 39

**Dislocation** refers to prices moving away from their no-arbitrage levels as a result of slow or lengthy periods of divergence

Question 40

The \_\_\_-to-\_\_\_ ___ provides a measure of divergence for a price series in a market.

Answer 40

The **signal**-to-**noise ratio** provides a measure of divergence for a price series in a market.

Question 41

Signal to Noise Ratio (Equation)

Answer 41

Question 42

Medium to long-term trend followers typically use about ___ days for the look-back window when calculating signal-to-noise ratios.

Answer 42

Medium to long-term trend followers typically use about **100** days for the look-back window when calculating signal-to-noise ratios.

Question 43

The ___ \_\_\_ ___ represents an aggregate measure of divergence in prices or the total market divergence for M markets and may be calculated as the average signal-to-noise ratio.

Answer 43

The **market divergence index** represents an aggregate measure of divergence in prices or the total market divergence for M markets and may be calculated as the average signal-to-noise ratio.

Question 44

Market divergence index (equation)

Answer 44

Question 45

Since futures markets are competitive, the AMH suggests that divergence in market prices should be \_\_\_, with ___ periods of divergence from a random walk.

Answer 45

Since futures markets are competitive, the AMH suggests that divergence in market prices should be **low,** with **infrequent** periods of divergence from a random walk.

Question 46

Some studies have found that systematic trend-following strategies ___ discretionary strategies on a risk-adjusted basis.

Answer 46

Some studies have found that systematic trend-following strategies **outperform** discretionary strategies on a risk-adjusted basis.

Question 47

Systematic funds tend to ___ discretionary funds when markets are falling and \_\_\_when markets are rising.

Answer 47

Systematic funds tend to **outperform** discretionary funds when markets are falling and **underperform** when markets are rising.

Question 48

Systematic funds have ___ Sharpe ratios, \_\_\_Jensen's alpha, \_\_\_skewness, \_\_\_kurtosis, and \_\_\_extreme drawdowns than discretionary funds.

Answer 48

Systematic funds have **higher** Sharpe ratios, **higher** Jensen's alpha, **lower** skewness, **lower** kurtosis, and **less** extreme drawdowns than discretionary funds.

Question 49

Managed futures strategies can earn positive returns by providing several services to market participants: 1. Enable participants to \_\_\_ 2. Provide \_\_\_ 3. Take offsetting positions for ___ etc.

Answer 49

Managed futures strategies can earn positive returns by providing several services to market participants: 1. Enable participants to **hedge** 2. Provide **liquidity** 3. Take offsetting positions for **rebalancing** etc.

Question 50

Managed futures have ___ hedging or liquidity provision opportunities in equities.

Answer 50

Managed futures have **fewer** hedging or liquidity provision opportunities in equities.

Question 51

Managed futures have ___ correlations with traditional asset classes.

Answer 51

Managed futures have **low** correlations with traditional asset classes.

Question 52

Futures contracts have ___ foreign exchange risk

Answer 52

Futures contracts have **little** foreign exchange risk

Question 53

Managed futures have ___ withholding taxes.

Answer 53

Managed futures have **no** withholding taxes.

Question 54

Futures contracts and markets have 3 distinct traits: 1. Futures' contracts gains and losses are ___ in cash ___ \_\_\_ 2. Futures contracts have no ___ \_\_\_ \_\_\_ 3. Futures market participants must ___ \_\_\_

Answer 54

Futures contracts and markets have 3 distinct traits: 1. Futures' contracts gains and losses are **settled** in cash **each day** 2. Futures contracts have no **net liquidating value** 3. Futures market participants must **post collateral**

Question 55

Systematic futures trading portfolio involves 4 key decisions. 1. \_\_\_ 2. ___ \_\_\_ 3. \_\_\_ 4. ___ \_\_\_

Answer 55

Systematic futures trading portfolio involves 4 key decisions. **1. Entry** **2. Position sizing** **3. Exit** **4. Asset Allocation**

Question 56

A trading system has 4 key components that are part of constructing a managed futures portfolio: 1. D\_\_\_ \_\_\_ 2. P\_\_\_ \_\_\_ 3. M\_\_\_ \_\_\_ 4. T\_\_\_ \_\_\_

Answer 56

A trading system has 4 key components that are part of constructing a managed futures portfolio: **1. Data processing** **2. Position sizing** **3. Market allocation** **4. Trading execution**

Question 57

Positions sizing should account for a market's volatility. Two approaches may be used to accomplish this: 1. V\_\_\_ \_\_\_ 2. R\_\_\_of \_\_\_

Answer 57

Positions sizing should account for a market's volatility. Two approaches may be used to accomplish this: **1. Volatility targeting** **2. Range of factors**

Question 58

Number of futures contracts as it relates to the volatility target (equation)

Answer 58

Question 59

\_\_\_ \_\_\_is a value selected by traders to reflect the desired market exposure.

Answer 59

**Risk loading** is a value selected by traders to reflect the desired market exposure.

Question 60

Risk loading x Equity is referred to as ___ at \_\_\_.

Answer 60

Risk loading x Equity is referred to as **capital** at **risk**.

Question 61

Number of futures contracts given price volatility

Answer 61

Question 62

Contract size or the ___ \_\_\_is the gain or loss in the contract from a one-point change in the futures prices

Answer 62

Contract size or the **point value** is the gain or loss in the contract from a one-point change in the futures prices

Question 63

PVol x Contract size is the ___ \_\_\_ ___ \_\_\_

Answer 63

PVol x Contract size is the **futures contract** **dollar risk**

Question 64

In the simplest form of market allocation, risk loading can be \_\_\_.

Answer 64

In the simplest form of market allocation, risk loading can be **equal**.

Question 65

Large CTA funds tend to allocate capital using the ___ \_\_\_ approach.

Answer 65

Large CTA funds tend to allocate capital using the **market** **capacity** approach.

Question 66

There are 3 key approaches to market allocation: 1. ___ \_\_\_risk 2. ___ \_\_\_ contribution 3. ___ \_\_\_ weighting

Answer 66

There are 3 key approaches to market allocation: 1. **Equal dollar** risk 2. **Equal risk** contribution 3. **Market** **capacity** weighting

Question 67

\_\_\_ \_\_\_is the rate at which performance degrades as execution is delayed.

Answer 67

**Alpha decay** is the rate at which performance degrades as execution is delayed.

Question 68

For short term strategies, ___ \_\_\_and ___ \_\_\_ are the factors for consideration

Answer 68

For short term strategies, **execution** **speed** and **alpha decay** are the factors for consideration

Question 69

For execution of long-term trend following systems, ___ is the relevant factor.

Answer 69

For execution of long-term trend following systems, **cost** is the relevant factor.

Question 70

Trend following systems are generally executed using ___ orders.

Answer 70

Trend following systems are generally executed using **market** orders.