CAIA - 26 - Investing in CTAs

Question 1

Futures markets are ___ efficient due to low transaction costs and bid-ask spreads

Answer 1

Futures markets are operationally efficient due to low transaction costs and bid-ask spreads

Question 2

Futures markets are ___ efficient due to the large number of traders with significant capital who are participating.

Answer 2

Futures markets are informationally efficient due to the large number of traders with significant capital who are participating.

Question 3

CTA indices have zero or ___ skewness

Answer 3

CTA indices have zero or positive skewness

Question 4

Empirical evidence indicates that the winning ratio of trades for trend following strategies is often ___ than 50%

Answer 4

Empirical evidence indicates that the winning ratio of trades for trend following strategies is often less than 50%

Question 5

Trend following strategies typically have numerous small losses and less frequent large gains, which creates a ___ ___profile similar to a call option.

Answer 5

Trend following strategies typically have numerous small losses and less frequent large gains, which creates a convex payout profile similar to a call option.

Question 6

A ___ percentage of a discretionary index’s volatility is explained by traditional factors and suggests that discretionary CTAs are ___heterogeneous than systematic CTAs

Answer 6

A smaller percentage of a discretionary index’s volatility is explained by traditional factors and suggests that discretionary CTAs are more heterogeneous than systematic CTAs

Question 7

CTA indices generated ___ returns during equity market drawdowns.

Answer 7

CTA indices generated positive returns during equity market drawdowns.

Question 8

Performance and divergence are ___ during periods of market stress.

Answer 8

Performance and divergence are higher during periods of market stress.

Question 9

A typical ___ involves long positions in calls and puts.

Answer 9

A typical straddle involves long positions in calls and puts.

Question 10

___ measure the rate of change of an options delta as the value of its underlying asset changes.

Answer 10

Gamma measure the rate of change of an options delta as the value of its underlying asset changes.

Question 11

Since trend-following CTAs increase the delta of their positions as prices move in their favor, they are long ___, not ___.

Answer 11

Since trend-following CTAs increase the delta of their positions as prices move in their favor, they are long gamma, not volatility.

Question 12

Relative value strategies are short ___.

Answer 12

Relative value strategies are short gamma.

Question 13

A straddle is ___ sensitive to volatility when it is almost at the money.

Answer 13

A straddle is most sensitive to volatility when it is almost at the money.

Question 14

A ___ ___-___ ___ ___ strategy is a portfolio management approach that adjusts portfolio weights over time to generate a convex payoff profile.

Answer 14

A dynamic trading-based long gamma strategy is a portfolio management approach that adjusts portfolio weights over time to generate a convex payoff profile.

Question 15

___ ___ is the measure of a strategy’s performance during market stress.

Answer 15

Crisis alpha is the measure of a strategy’s performance during market stress.

Question 16

Trend-following strategies generate ___ crisis alpha, while hedge funds create ___crisis alpha.

Answer 16

Trend-following strategies generate positive crisis alpha, while hedge funds create negative crisis alpha.

Question 17

There are 3 sources of crisis alpha for CTAs:

1. Trade in highly ___ markets
2. They are ___-___
3. Trade futures, so not exposed to ___ ___ restrictions or squeezes

Answer 17

There are 3 sources of crisis alpha for CTAs:

1. Trade in highly liquid markets
2. They are multi-asset
3. Trade futures, so not exposed to short sale restrictions or squeezes

Question 18

Futures contracts provide ___ leverage

Answer 18

Futures contracts provide implicit leverage

Question 19

Implicit leverage (equation)

Answer 19

Notional value / Initial margin

Question 20

The ___ ___is the amount of capital traded in a future’s market, depending on a CTA’s leverage goals.

Answer 20

The trading level is the amount of capital traded in a future’s market, depending on a CTA’s leverage goals.

Question 21

The ___ ___enables investors to leverage their managed futures account to a higher trading level than available with cash funding.

Answer 21

The notional funding enables investors to leverage their managed futures account to a higher trading level than available with cash funding.

Question 22

Implicit leverage has a relatively ___ cost.

Answer 22

Implicit leverage has a relatively low cost.

Question 23

The ___ ___is the cash or collateral posted or invested by investors to support the trading level.

Answer 23

The funding level is the cash or collateral posted or invested by investors to support the trading level.

Question 24

The ___ ___is the difference between the trading level and the funding level.

Answer 24

The notional level is the difference between the trading level and the funding level.

Question 25

A futures margin account has a ___ \_\_\_, which is the minimum amount of collateral needed in the account and is typically \_\_\_than the initial margin.

Answer 25

A futures margin account has a **maintenance margin**, which is the minimum amount of collateral needed in the account and is typically **less** than the initial margin.

Question 26

The \_\_\_-to-\_\_\_ratio is the amount of assets held to meet margin requirements as a percentage of NAV.

Answer 26

The **margin**-to-**equity** ratio is the amount of assets held to meet margin requirements as a percentage of NAV.

Question 27

Margin-to-equity ratio equation

Answer 27

Margin requirement / NAV

Question 28

\_\_\_ at \_\_\_represents the loss incurred if each position hits its stop-loss price level, and is often expressed as a percentage of \_\_\_.

Answer 28

**Capital** at **Risk** represents the loss incurred if each position hits its stop-loss price level, and is often expressed as a percentage of **NAV**.

Question 29

Capital at risk equation

Answer 29

Loss if positions hit stop loss / NAV

Question 30

\_\_\_ at \_\_\_is a measure of potential loss in an investment portfolio for a given holding period and confidence level.

Answer 30

**Value** at **Risk** is a measure of potential loss in an investment portfolio for a given holding period and confidence level.

Question 31

VaR (equation - assuming normal distribution)

Answer 31

Question 32

variance based on exponential smoothing model.

Answer 32

Question 33

A measure related to maximum drawdown is ___ \_\_\_, which is the amount of time between two NAV peaks.

Answer 33

A measure related to maximum drawdown is **drawdown duration**, which is the amount of time between two NAV peaks.

Question 34

Many traditional risk measures depend on assumptions about return distributions. In contrast, an ___ \_\_\_is a risk measure that incorporates and investment's entire distribution.

Answer 34

Many traditional risk measures depend on assumptions about return distributions. In contrast, an **omega ratio** is a risk measure that incorporates and investment's entire distribution.

Question 35

Omega equation

Answer 35

Question 36

Empirical data indicate that, for a target level of zero, the omega of a diversified portfolio of CTAs is approximately ___ and \_\_\_for World Equities.

Answer 36

Empirical data indicate that, for a target level of zero, the omega of a diversified portfolio of CTAs is approximately **four** and **two** for World Equities

Question 37

Using an index of long-only futures contracts (is/is not) a good approach to benchmarking.

Answer 37

Using an index of long-only futures contracts **is not** a good approach to benchmarking.

Question 38

A key issue with using a peergroup as a benchmark is that it is not \_\_\_.

Answer 38

A key issue with using a peergroup as a benchmark is that it is not **investable**.

Question 39

Investable indices may suffer from ___ \_\_\_, because some managers may elect not to be included in the index.

Answer 39

Investable indices may suffer from **access bias**, because some managers may elect not to be included in the index.

Question 40

Algorithmic based indices are primarily used for \_\_\_-\_\_\_CTAs

Answer 40

Algorithmic based indices are primarily used for **trend**-**following** CTAs

Question 41

\_\_\_ are the most suitable benchmarks for discretionary CTAs

Answer 41

**Peergroups** are the most suitable benchmarks for discretionary CTAs

Question 42

CTA funds provide investors ___ transparency than managed accounts.

Answer 42

CTA funds provide investors **less** transparency than managed accounts.

Question 43

\_\_\_ are a hybrid of managed accounts and CTA funds.

Answer 43

**Platforms** are a hybrid of managed accounts and CTA funds.