CAIA - 25 - Managed Futures Flashcards
Professional managed futures money managers are referred to as ___ ___ ___ (CTAs).
Professional managed futures money managers are referred to as commodity trading advisers (CTAs).
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.
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.
The ___ ___ ___ ___ was created in 1974 as a federal regulatory agency for all futures and derivatives trading.
The commodity futures trading commission (CFTC) was created in 1974 as a federal regulatory agency for all futures and derivatives trading.
The ___ ___ ___ was created in 1982 and is an independent industry-supported self-regulatory body. It is a supplement to the CFTC.
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.
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.
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.
Managed futures strategies can be classified in four core dimensions:
- D___ ___
- I___ ___
- T___ ___
- S___ ___
Managed futures strategies can be classified in four core dimensions:
1. Data Sources
2. Implementation Style
3. Time Horizon
4. Strategy Focus
Managed futures strategies can be classified as ___ or ___based on their data source.
Managed futures strategies can be classified as fundamental or technical based on their data source.
___ strategies use data such as economic forecasts and supply and demand estimates.
Fundamental strategies use data such as economic forecasts and supply and demand estimates.
___ strategies use historical prices and volume data.
Technical strategies use historical prices and volume data.
Managed futures implementation styles are classified as ___ or ___.
Managed futures implementation styles are classified as systematic or discretionary.
___ strategies use rules based on quantitative models that identify entry and exit positions, position scaling, and position size.
Systematic strategies use rules based on quantitative models that identify entry and exit positions, position scaling, and position size.
___ strategies aim to capture market driven price opportunities with the trading decision being made by the fund manager.
Discretionary strategies aim to capture market driven price opportunities with the trading decision being made by the fund manager.
Discretionary strategies are typically ___ diversified than systematic traders.
Discretionary strategies are typically less diversified than systematic traders.
Many discretionary managers (do/do not) use quant models to determine positions.
Many discretionary managers do use quant models to determine positions.
High frequency trading strategies (are/are not) typically classified as managed futures strategies.
High frequency trading strategies are not typically classified as managed futures strategies.
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.
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.
Mean reversion and countertrend strategies are typically ___ term, where trend-following are often ___or ___term strategies. ___funds generally combine several approaches.
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.
There are a number of key issues associated with dynamic futures trading strategies:
- T___ ___
- T___ ___
- S___
There are a number of key issues associated with dynamic futures trading strategies:
1. Transaction Costs
2. Trading Capacity
3. Slippage
___ refers to performance deviating from expected trading results based on a model’s signal.
Slippage refers to performance deviating from expected trading results based on a model’s signal.
Some of the more common strategy focuses for managed futures are:
- M___
- M___ ___
- G___ ___
- R___ ___
- C___ ___
- M___-___
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
___ refers to the rate at which a security’s price changes
Momentum refers to the rate at which a security’s price changes
A ___-___momentum strategy would buy outperforming assets and sell underperforming assets.
A cross-sectional momentum strategy would buy outperforming assets and sell underperforming assets.
In futures markets, ___-___momentum strategies are typically implemented, which go long and short futures markets across time and asset classes.
In futures markets, time-series momentum strategies are typically implemented, which go long and short futures markets across time and asset classes.
Moving average and breakout strategies are two strategies used to generate ___ ___.
Moving average and breakout strategies are two strategies used to generate trading signals.
A ___ ___ ___ strategy establishes signals based on MVAs over different look-back periods.
A moving average crossover strategy establishes signals based on MVAs over different look-back periods.
___ strategies generate trend signals when a price breaks out of a range of past values, referred to as ___ ___ and ___ ___.
Breakout strategies generate trend signals when a price breaks out of a range of past values, referred to as resistance levels and support levels.
A breakout strategy position is exited when an opposite breakout trend signal is generated or when a ___ ___is reached.
A breakout strategy position is exited when an opposite breakout trend signal is generated or when a trailing stop is reached.
A ___ ___is a trade order that specifies a stop-loss price as a % or dollar amount below a price.
A trailing stop is a trade order that specifies a stop-loss price as a % or dollar amount below a price.
___ ___managed futures strategies are discretionary strategies that identify and take long and short positions in various futures markets based on fundamental data.
Global macro managed futures strategies are discretionary strategies that identify and take long and short positions in various futures markets based on fundamental data.
Fundamental based global macro strategies enter trends ___ than trend-following strategies.
Fundamental based global macro strategies enter trends earlier than trend-following strategies.
___ ___ managed futures strategies aim to identify relative mispricings between different assets across time or markets.
Relative value managed futures strategies aim to identify relative mispricings between different assets across time or markets.
Mean-reversion strategies are typically ___-term strategies and trend-following strategies are more ___term.
Mean-reversion strategies are typically short-term strategies and trend-following strategies are more long term.
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.
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.
The ___ form of the efficient market hypothesis maintains that all relevant information is incorporated in prices.
The strong form of the efficient market hypothesis maintains that all relevant information is incorporated in prices.
The efficient markets hypothesis (may/may not) be the best framework for understanding managed futures strategies.
The efficient markets hypothesis may not be the best framework for understanding managed futures strategies.
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.
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.
There are 4 key practical implications of an adaptive view on markets:
- ___-___risk premiums
- Market efficiency is ___
- Adapting for ___and ___
- Inevitable degradation of ___
There are 4 key practical implications of an adaptive view on markets:
- Time-varying risk premiums
- Market efficiency is relative
- Adapting for success and survival
- Inevitable degradation of alpha
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.
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.
____ refers to prices moving away from their no-arbitrage levels as a result of slow or lengthy periods of divergence
Dislocation refers to prices moving away from their no-arbitrage levels as a result of slow or lengthy periods of divergence
The ___-to-___ ___ provides a measure of divergence for a price series in a market.
The signal-to-noise ratio provides a measure of divergence for a price series in a market.
Signal to Noise Ratio (Equation)
Medium to long-term trend followers typically use about ___ days for the look-back window when calculating signal-to-noise ratios.
Medium to long-term trend followers typically use about 100 days for the look-back window when calculating signal-to-noise ratios.
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.
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.
Market divergence index (equation)
Since futures markets are competitive, the AMH suggests that divergence in market prices should be ___, with ___ periods of divergence from a random walk.
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.
Some studies have found that systematic trend-following strategies ___ discretionary strategies on a risk-adjusted basis.
Some studies have found that systematic trend-following strategies outperform discretionary strategies on a risk-adjusted basis.
Systematic funds tend to ___ discretionary funds when markets are falling and ___when markets are rising.
Systematic funds tend to outperform discretionary funds when markets are falling and underperform when markets are rising.
Systematic funds have ___ Sharpe ratios, ___Jensen’s alpha, ___skewness, ___kurtosis, and ___extreme drawdowns than discretionary funds.
Systematic funds have higher Sharpe ratios, higher Jensen’s alpha, lower skewness, lower kurtosis, and less extreme drawdowns than discretionary funds.
Managed futures strategies can earn positive returns by providing several services to market participants:
- Enable participants to ___
- Provide ___
- Take offsetting positions for ___ etc.
Managed futures strategies can earn positive returns by providing several services to market participants:
- Enable participants to hedge
- Provide liquidity
- Take offsetting positions for rebalancing etc.
Managed futures have ___ hedging or liquidity provision opportunities in equities.
Managed futures have fewer hedging or liquidity provision opportunities in equities.
Managed futures have ___ correlations with traditional asset classes.
Managed futures have low correlations with traditional asset classes.
Futures contracts have ___ foreign exchange risk
Futures contracts have little foreign exchange risk
Managed futures have ___ withholding taxes.
Managed futures have no withholding taxes.
Futures contracts and markets have 3 distinct traits:
- Futures’ contracts gains and losses are ___ in cash ___ ___
- Futures contracts have no ___ ___ ___
- Futures market participants must ___ ___
Futures contracts and markets have 3 distinct traits:
- Futures’ contracts gains and losses are settled in cash each day
- Futures contracts have no net liquidating value
- Futures market participants must post collateral
Systematic futures trading portfolio involves 4 key decisions.
- ___
- ___ ___
- ___
- ___ ___
Systematic futures trading portfolio involves 4 key decisions.
1. Entry
2. Position sizing
3. Exit
4. Asset Allocation
A trading system has 4 key components that are part of constructing a managed futures portfolio:
- D___ ___
- P___ ___
- M___ ___
- T___ ___
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
Positions sizing should account for a market’s volatility. Two approaches may be used to accomplish this:
- V___ ___
- R___of ___
Positions sizing should account for a market’s volatility. Two approaches may be used to accomplish this:
1. Volatility targeting
2. Range of factors
Number of futures contracts as it relates to the volatility target (equation)
___ ___is a value selected by traders to reflect the desired market exposure.
Risk loading is a value selected by traders to reflect the desired market exposure.
Risk loading x Equity is referred to as ___ at ___.
Risk loading x Equity is referred to as capital at risk.
Number of futures contracts given price volatility
Contract size or the ___ ___is the gain or loss in the contract from a one-point change in the futures prices
Contract size or the point value is the gain or loss in the contract from a one-point change in the futures prices
PVol x Contract size is the ___ ___ ___ ___
PVol x Contract size is the futures contract dollar risk
In the simplest form of market allocation, risk loading can be ___.
In the simplest form of market allocation, risk loading can be equal.
Large CTA funds tend to allocate capital using the ___ ___ approach.
Large CTA funds tend to allocate capital using the market capacity approach.
There are 3 key approaches to market allocation:
- ___ ___risk
- ___ ___ contribution
- ___ ___ weighting
There are 3 key approaches to market allocation:
- Equal dollar risk
- Equal risk contribution
- Market capacity weighting
___ ___is the rate at which performance degrades as execution is delayed.
Alpha decay is the rate at which performance degrades as execution is delayed.
For short term strategies, ___ ___and ___ ___ are the factors for consideration
For short term strategies, execution speed and alpha decay are the factors for consideration
For execution of long-term trend following systems, ___ is the relevant factor.
For execution of long-term trend following systems, cost is the relevant factor.
Trend following systems are generally executed using ___ orders.
Trend following systems are generally executed using market orders.
