Recent research shows that CTAs need to factor in autocorrelation to accurately estimate the risk of their portfolio, writes Galen Stops
Drawdown is the money that an investor has lost since
reaching their most recent high-water mark and is of particular
interest to the managed futures industry which has suffered
significant drawdowns recently.
At the end of 2012 the Newedge CTA index, which tracks the
performance of the top 20 CTAs that are open for investment,
was down 2.84% for the year and had fallen 9.27% from the
previous high water mark in April 2011. That's a 20 month
drawdown, making it one of the worst on record.
Understanding drawdowns is important for CTAs and how they
perceive risk, with recent research from Newedge arguing that
CTAs that have not accounted for autocorrelation may be
miscalculating their risk profile.
Examining global equities in comparison to the CTA index the
research noted that the equities exhibited a much deeper and
longer drawdown than the CTA index, even if both have the same
annualised mean return (5%) and volatility (15%).
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