<s> Commodity Trading
Advisors
John Wiley & SonsFounded in 1807, John Wiley & Sons is the oldest independent publishingcompany in the United States. With offices in North America, Europe,Australia, and Asia, Wiley is globally committed to developing and marketing print and electronic products and services for our customers’ professional and personal knowledge and understanding.The Wiley Finance series contains books written specifically for financeand investment professionals, as well as sophisticated individual investorsand their financial advisors. Book topics range from portfolio management to e-commerce, risk management, financial engineering, valuation,and financial instrument analysis, as well as much more.For a list of available titles, visit our web site at www.WileyFinance.com.
Commodity Trading
AdvisorsRisk, Performance Analysis,and Selection
GREG N. GREGORIOUVASSILIOS N. KARAVASFRANÇOIS-SERGE LHABITANTFABRICE ROUAH
John Wiley & Sons, Inc.
To my mother Evangelia, and in memory of mybeloved father Nicholas—G.N.G.To my parents Virginia and Nikos—V.K.To the ones I love—F.S.L.To my parents Jacqueline and Jean, andin loving memory of my grandfather David—F.R.
Copyright © 2004 by Greg N. Gregoriou, Vassilios N. Karavas, François-Serge Lhabitant,and Fabrice Rouah. All rights reserved.Published by John Wiley & Sons, Inc., Hoboken, New Jersey.Published simultaneously in Canada.No part of this publication may be reproduced, stored in a retrieval system, or transmittedin any form or by any means, electronic, mechanical, photocopying, recording, scanning,or otherwise, except as permitted under Section 107 or 108 of the 1976 United StatesCopyright Act, without either the prior written permission of the Publisher, or authorizationthrough payment of the appropriate per-copy fee to the Copyright Clearance Center, Inc.,222 Rosewood Drive, Danvers, MA 01923, 978-750-8400, fax 978-646-8600, or on theweb at www.copyright.com. Requests to the Publisher for permission should be addressedto the Permissions Department, John Wiley & Sons, Inc., 111 River Street, Hoboken, NJ07030, 201-748-6011, fax 201-748-6008.Limit of Liability/Disclaimer of Warranty: While the publisher and author have used theirbest efforts in preparing this book, they make no representations or warranties with respectto the accuracy or completeness of the contents of this book and specifically disclaim anyimplied warranties of merchantability or fitness for a particular purpose. No warranty maybe created or extended by sales representatives or written sales materials. The advice andstrategies contained herein may not be suitable for your situation. You should consultwith a professional where appropriate. Neither the publisher nor author shall be liable forany loss of profit or any other commercial damages, including but not limited to special,incidental, consequential, or other damages.For general information on our other products and services, or technical support, pleasecontact our Customer Care Department within the United States at 800-762-2974, outsidethe United States at 317-572-3993 or fax 317-572-4002.Wiley also publishes its books in a variety of electronic formats. Some content that appearsin print may not be available in electronic books.For more information about Wiley products, visit our web site at www.wiley.com.Library of Congress Cataloging-in-Publication DataCommodity trading advisors : risk, performance analysis, and selection /[edited by] Greg N. Gregoriou . . . [et al.].p. cm.ISBN 0-471-68194-6 (cloth)1. Commodity trading advisors. I. Gregoriou, Greg N., 1956–HG6046.5.C66 2004332.64'4—dc222004007925Printed in the United States of America10 9 8 7 6 5 4 3 2 1
Contents
Preface
ix
Acknowledgments
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About the Editors
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About the Authors
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Introduction
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PART ONEPerformance
1
CHAPTER 1Managed Futures and Hedge Funds: A Match Made in Heaven
5
Harry M. Kat
CHAPTER 2Benchmarking the Performance of CTAs
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Lionel Martellini and Mathieu Vaissié
CHAPTER 3Performance of Managed Futures:Persistence and the Source of Returns
31
B. Wade Brorsen and John P. Townsend
CHAPTER 4CTA Performance, Survivorship Bias, and Dissolution Frequencies
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Daniel Capocci
CHAPTER 5CTA Performance Evaluation with Data Envelopment Analysis
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Gwenevere Darling, Kankana Mukherjee, and Kathryn Wilkens
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CONTENTS
CHAPTER 6The Performance of CTAs in Changing Market Conditions
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Georges Hübner and Nicolas Papageorgiou
CHAPTER 7Simple and Cross-Efficiency of CTAs Using Data Envelopmennt Analysis
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Fernando Diz, Greg N. Gregoriou, Fabrice Rouah,and Stephen E. Satchell
PART TWORisk and Managed Futures Investing
149
CHAPTER 8The Effect of Large Hedge Fund and CTA Tradingon Futures Market Volatility
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Scott H. Irwin and Bryce R. Holt
CHAPTER 9Measuring the Long Volatility Strategies of Managed Futures
183
Mark Anson and Ho Ho
CHAPTER 10The Interdependence of Managed Futures Risk Measures
203
Bhaswar Gupta and Manolis Chatiras
CHAPTER 11Managing Downside Risk in Return DistributionsUsing Hedge Funds, Managed Futures, and Commodity Indices
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Mark Anson
PART THREEManaged Futures Investing, Fees, and Regulation
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CHAPTER 12Managed Futures Investing
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James Hedges IV
Contents
CHAPTER 13The Effect of Management and Incentive Fees on the Performanceof CTAs: A Note
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248
Fernando Diz
CHAPTER 14Managed Futures Funds and Other Fiduciary Products:The Australian Regulatory Model
259
Paul U. Ali
PART FOURProgram Evaluation, Selection, and Returns
275
CHAPTER 15How to Design a Commodity Futures Trading Program
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Hilary Till and Joseph Eagleeye
CHAPTER 16Choosing the Right CTA: A Contingent Claim Approach
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Zsolt Berenyi
CHAPTER 17CTAs and Portfolio Diversification: A Study through Time
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Nicolas Laporte
CHAPTER 18Random Walk Behavior of CTA Returns
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Greg N. Gregoriou and Fabrice Rouah
CHAPTER 19CTA Strategies for Returns-Enhancing Diversification
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David Kuo Chuen Lee, Francis Koh, and Kok Fai Phoon
CHAPTER 20Incorporating CTAs into the Asset Allocation Process:A Mean-Modified Value at Risk FrameworkMaher Kooli
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CHAPTER 21ARMA Modeling of CTA Returns
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Vassilios N. Karavas and L. Joe Moffitt
CHAPTER 22Risk-Adjusted Returns of CTAs: Using the Modified Sharpe Ratio
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Robert Christopherson and Greg N. Gregoriou
CHAPTER 23Time Diversification: The Case of Managed Futures
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François-Serge Lhabitant and Andrew Green
REFERENCES
399
INDEX
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Preface
he idea for this book came about when we realized that a collection ofmanaged futures articles dealing with quantitative and qualitative analyses of commodity trading advisors (CTAs) could be a useful and welcomedaddition to existing books on the subject. The chapters that follow introduce readers to many of the issues related to managed futures that webelieve are vital for proper selection and monitoring of CTAs. These issuesinclude performance assessment, benchmarking, and risk management ofmanaged futures investing, evaluation and design of managed futures programs, CTA management and incentive fees, and regulatory considerations.All chapters in this book are written by leading academics and practitioners in the area of alternative investments. Although some chapters aretechnical in nature, we have asked the contributors of those chapters toemphasize the impact of their analytical results on managed futures investing, rather than to focus on technical topics.We, therefore, believe this book can serve as a guide for institutionalinvestors, pension funds managers, endowment funds, and high-net-worthindividuals wanting to add CTAs to traditional stock and bond portfolios.
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Acknowledgments
T
he editors would like to thank Richard E. Oberuc Sr. of Laporte AssetAllocation System (www.laportesoft.com) and Sol Waksman of theBarclay Trading Group, Ltd. (www.barclaygrp.com) for providing data andsoftware. As well, we thank www.alternativesoft.com for their use ofExtreme Metrics and HF Optimizer software. We thank Allison Adams atInstitutional Investors Journals for allowing us to reproduce one of theirarticles (Chapter 18). We also thank Mr. Chris Bonnet at Peritus Group (www.peritus.ca) and everyone at Schneeweis Partners.In addition, we would like to thank Bill Falloon, senior finance editor,and Liam Kuhn, editorial assistant, both at Wiley, for their enthusiasticsupport and constructive comments; this book could not have come at abetter time. We also extend sincere and warmest thanks to Alexia Meyers,senior production editor at Wiley, for her wonderful assistance in editingand meticulously reviewing the manuscript.
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About the Editors
Greg N. Gregoriou is Assistant Professor of Finance and faculty researchcoordinator in the School of Business and Economics at Plattsburgh StateUniversity of New York. He obtained his Ph.D. in Finance and his M.B.A.from the University of Quebec at Montreal and his B.A. in Economics fromConcordia University, Montreal. Dr. Gregoriou is the hedge fund editor forthe peer-reviewed journal Derivatives Use, Trading and Regulation basedin the U.K and has authored over 35 articles on hedge funds and CTAs invarious U.S. and U.K. peer-reviewed publications along with 20 professional publications in brokerage and pension fund magazines in Canada.He is also an Associate at Peritus Group, a Montreal-based consultancy.Vassilios N. Karavas is currently Director of Research at Schneeweis Partners in Amherst, Massachusetts. His research focus is on alternative optimization techniques ranging from disequilibrium market models to hedgefund portfolio selection. Dr. Karavas holds a Ph.D. in Operations Researchfrom the University of Massachusetts at Amherst, an M.Sc. and a Diplomain Industrial Engineering both from the Technical University of Crete, Chania, Greece. He is also a research associate of the Center for InternationalSecurities and Derivatives Market.François-Serge Lhabitant is Head of Research at Kedge Capital, U.K., aProfessor of Finance at Hautes Etudes Commerciales (HEC), University ofLausanne, Switzerland, and a Professor of Finance at the Edhec BusinessSchool, France. He was previously a Director at UBS/Global Asset Management in charge of quantitative analysis and a member of Senior Management at Union Bancaire Privée (UBP), Geneva, responsible for allquantitative research and risk analysis of UBP’s alternative asset management group. Dr. Lhabitant received a Ph.D. in Finance, an M.Sc. in Banking and Finance, and a B.Sc. in Economics, all from the University ofLausanne, as well as a degree in Computer Engineering from the SwissFederal Institute of Technology. He is the author of two Wiley bookson hedge funds investing and emerging markets, and has publishedmore than 300 articles in leading academic journals, edited books, andnewspapers.
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ABOUT THE EDITORS
Fabrice Rouah is an Institut de Finance Mathématique de Montréal (IFM2)Scholar and a Ph.D. Candidate in Finance, McGill University, Montreal,Quebec. Mr. Rouah is a former Faculty Lecturer and Consulting Statisticianin the Department of Mathematics and Statistics at McGill University. Heholds an M.Sc. from McGill University and a B.Sc. in applied mathematicsfrom Concordia University, Montreal, Quebec. Mr. Rouah specializes in thestatistical and stochastic modeling of hedge funds and managed futures,and is a regular contributor to peer-reviewed academic publications onalternative investments. Mr. Rouah is also an Associate at Peritus Group.
About the Authors
Paul U. Ali is a Senior Lecturer in the Faculty of Law, University of Melbourne, and member of the University of Melbourne’s Centre for CorporateLaw and Securities Regulation. He is also a principal of Stellar Capital, aprivate investment firm in Sydney. Dr. Ali previously worked for severalyears as a finance lawyer in Sydney. He is also a coauthor of CorporateGovernance and Investment Fiduciaries (Sydney: Lawbook Co., 2003),which examines the corporate governance aspects of managed investmentproducts.Mark Anson is the Chief Investment Officer for the California PublicEmployees’ Retirement System (CalPERS). He has complete responsibilityfor all asset classes in which CalPERS invests, including domestic and international equity and fixed income, real estate, corporate governance, currency overlay, securities lending, venture capital, leveraged buyouts, andhedge funds. Dr. Anson earned his law degree from the Northwestern University School of Law in Chicago, his Ph.D. and Master’s in Finance fromthe Columbia University Graduate School of Business in New York City,and his B.A. from St. Olaf College in Minnesota. Dr. Anson is a member ofthe New York and Illinois State Bar associations and has earned accountingand financial designations. He is the author of four books on financial markets and has published over 60 research articles on the topics of corporategovernance, hedge funds, real estate, currency overlay, credit risk, privateequity, risk management, and portfolio management. Dr. Anson is on theeditorial boards of five financial journals and sits on Advisory Committeesfor the New York Stock Exchange, the International Association of Financial Engineers, AIMR’s Task Force on Corporate Governance, the Centerfor Excellence in Accounting and Security Analysis at Columbia University,and the Alternative Investment Research Centre at the City University ofLondon.Zsolt Berenyi holds an M.Sc. in Economics from the University of Budapestand a Ph.D. in Finance from the University of Munich. His research focusincludes the risk and performance evaluation of alternative investments,hedge funds, and leveraged and credit funds. After working years for
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Deutsche Bank, Dr. Berenyi currently is working as a consultant in the areaof asset management for various leading European financial institutions.B. Wade Brorsen is a Regents Professor and Jean and Patsy Neustadt Chairin the Department of Agricultural Economics at Oklahoma State University.Daniel Capocci is a Ph.D. student at the University of Liège in Belgium. Hisareas of research are hedge fund performance and performance persistence.He has published theoretical and empirical articles on hedge funds in severalBelgian, English, French, Swiss, and Luxembourg journals and presented hiswork in various university-sponsored conferences. His main contribution isthe development of a multifactor model to analyze hedge fund performance.Since September 2001, and independently of his academic research, he hasworked for an international Luxembourg bank. Mr. Capocci received hisMaster’s in Management Science from the University of Liège and his Master’s in Finance from the Hautes Etudes Commerciales (HEC) Liège.Manolis Chatiras holds an M.B.A. from the University of Massachusetts atAmherst with a concentration in finance. He received his B.S. (cum laude)in Business Administration from the University of Maine in Orono. He iscurrently a research associate at the Center for International Securities andDerivatives Markets at the University of Massachusetts, where he conductsresearch that focuses on the international diversification and risk management potential of hedge funds, managed futures, and CTAs.Robert Christopherson is Associate Professor and Chair of Economics andFinance at the School of Business and Economics, State University of NewYork, (Plattsburgh). He received his Ph.D. in Economics from Wayne StateUniversity in 1990. Dr. Christopherson is a coeditor and contributingauthor of The Virtuous Vice: Globalization, published by Praeger in 2004,and has numerous articles, papers, and book reviews to his credit appearing in journals, books, and trade publications.Gwenevere Darling holds a B.S. in Actuarial Mathematics and ManagementEngineering with a concentration in Quantitative Finance from WorcesterPolytechnic Institute.Fernando Diz is the Whitman Associate Professor of Finance at the Syracuse University Martin J. Whitman School of Management. He also hasbeen Visiting Associate Professor of Finance at the Johnson GraduateSchool of Management, Cornell University, where he taught courses onderivatives and financial engineering. Professor Diz is also the Founder andPresident of M&E Financial Markets Research, LLC. He specializes in
About the Authors
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managed futures, money management, market volatility, and the use ofderivative securities in investment and speculative portfolios as well as distress and value investing. His research has appeared in numerous peerreviewed and industry publications. Professor Diz has presented his researchat academic forums as well as industry forums such as the American StockExchange Derivatives Colloquium, the Managed Funds Association’sForum for Managed Futures, and the Chicago Board of Trade ResearchSeminars. Professor Diz received his doctorate from Cornell University.Joseph Eagleeye is Cofounder and Portfolio Manager at Premia CapitalManagement, LLC, in Chicago. Premia Capital specializes in detectingpockets of predictability in derivatives markets by using statistical techniques. As a principal of the Quartile Group, Mr. Eagleeye also advisesinvestment companies on hedging strategies, benchmark construction,index replication strategies, and risk management. He has been involved inthe commodity markets since 1994. Prior to joining Premia, he developedprogrammed trading applications for Morgan Stanley’s Equity Division andproprietary computer models for urban economics. From 1994 to 1998 heworked in the Derivative Strategies Group of Putnam Investments where heresearched, back-tested, and implemented relative-value derivatives strategies. Mr. Eagleeye holds a degree in Applied Mathematics from Yale University and an M.B.A. from the University of California at Berkeley.Andrew Green graduated in March 2004 with an MBA degree in Financefrom Thunderbird, the American Graduate School of International Management. He is a former Research Assistant at the High Energy ParticlePhysics Lab of Colorado State University.Bhaswar Gupta is a Ph.D. candidate in the Department of Finance at theUniversity of Massachusetts and a Research Associate at the Center forInternational Securities and Derivatives Markets. He is currently workingon his dissertation and is editorial assistant for the Journal of AlternativeInvestments. He is also a research associate with the Chartered AlternativeInvestment Analyst Association, a nonprofit educational association thatfocuses on alternative investment education and is the sponsoring organization for the Chartered Alternative Investment Analyst designation.James Hedges IV is the Founder, President, and Chief Investment Officer ofLJH Global Investments, LLC, in Naples, Florida, and San Francisco, California, and President of LJH Global Investments, Ltd., in London. LJHprovides access to hedge fund managers who have been subjected to rigorous due diligence by hedge fund research analysts. The LJH organizationalso includes professionals in client development, sales force training, client
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ABOUT THE AUTHORS
service, and operations/reporting. In addition, LJH provides fund of hedgefunds products for direct distribution to qualified investors.Ho Ho, Quantitative Portfolio Manager in the Global Equity Unit for theCalifornia Public Employees’ Retirement System (CalPERS), is responsiblefor research and development of internal active strategies for equity portfolios, hedge fund risk management, quantitative models for hedge fund riskattribution, manager monitoring, quantitative portfolio construction modeldevelopment, and a team member of CalPERS’ hedge fund program. He isalso responsible for system and model validation of CalPERS’ enterprisewide risk management system. Prior to joining CalPERS, Mr. Ho was derivatives manager for Transamerica Life Insurance Company. He also workedfor KPMG as manager of their Structure Finance Consulting Group. Heholds an M.B.A. in Finance from the University of Chicago and a B.A. (PhiBeta Kappa) in Economics from the University of California, Irvine.Bryce R. Holt began his education at Brigham Young University, where heearned his B.S. in Economics. As a part of his graduate studies at the Schoolof Agricultural and Consumer Economics at the University of Illinois, heaccepted an internship position at Kraft Foods and for four months performed fundamental analytical work in the coffee, sugar, and grain markets. After finishing his M.S. degree, he returned to Kraft Foods as aCommodity Analyst and was quickly promoted to Associate Risk Manager.In early 2001 he accepted a position as Corporate Purchasing and PriceRisk Manager with ACH Food Companies, where he now has full supplychain and risk management responsibilities for commodity ingredients,energy, currency, and ACH’s High Oleic Sunflower Oil program.Georges Hübner holds a Ph.D. in Management from INSEAD. He is theDeloitte Professor of Financial Management at the University of Liège andalso teaches finance at Maastricht University and EDHEC (Lille). He hastaught at the executive and postgraduate levels in several countries inEurope, North America, Africa, and Asia. He has written two books onfinancial management and has authored several peer-reviewed researcharticles on hedge funds and derivatives. He was the recipient of the prestigious 2002 Iddo Sarnat Award for the best paper published in the Journalof Banking and Finance in 2001.Scott H. Irwin earned his B.S. in Agricultural Business from Iowa StateUniversity and his M.S. in Agricultural Economics and Ph.D. from PurdueUniversity. After completing his Ph.D. in 1985, Dr. Irwin joined the Department of Agricultural Economics and Rural Sociology at the Ohio State University. From 1993 to 1994 Dr. Irwin was a Visiting Scholar in the Office
About the Authors
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for Futures and Options Research at the University of Illinois. In 1996 hewas named the first holder of the Francis B. McCormick Professor of Agricultural Marketing and Policy at the Ohio State University. In 1997 Dr.Irwin joined the Department of Agricultural and Consumer Economics atthe University of Illinois. In 2003 Dr. Irwin was named the Laurence J. Norton Professor in Agricultural Marketing at the University of Illinois. He currently serves as the team leader for the farmdoc Project, is codirector of theAgMAS Project, and is an Associate in the Office for Futures and OptionsResearch. His recent research focuses on the performance of farm marketadvisory services, investment performance, and market impact of managedfutures, the value of public information in commodity markets, and theforecasting accuracy of corn and soybean futures prices. His work has beenpublished in leading academic journals. In 2002 he received the Distinguished Group Extension Award from the American Agricultural Economics Association as part of the farmdoc team.Harry M. Kat is Professor of Risk Management and Director of the Alternative Investment Research Centre at the Sir John Cass Business SchoolCity University, London. Before returning to academia, Professor Kat wasHead of Equity Derivatives Europe at Bank of America in London, Head ofDerivatives Structuring and Marketing at First Chicago in Tokyo, and Headof Derivatives Research at MeesPierson in Amsterdam. He holds MBA andPh.D degrees in Economics and Econometrics from the Tinbergen Graduate School of Business at the University of Amsterdam and is a member ofthe editorial board of the Journal of Derivatives and the Journal of Alternative Investments. He has coauthored numerous articles in well-knowninternational finance journals. His latest book, Structured Equity Derivatives, was published in July 2001 by John Wiley & Sons.Francis Koh is Practice Associate Professor of Finance at the SingaporeManagement University. He is concurrently Director of the M.Sc. in WealthManagement Program. He holds a Ph.D. in Finance from the University ofNew South Wales and an M.B.A. from the University of British Columbia.Prior to joining Singapore Management University, Dr. Koh worked with amultibillion-dollar global investment company based in Singapore.Maher Kooli is Assistant Professor of Finance at the School of Business andManagement, University of Quebec, in Montreal. He also worked as aSenior Research Advisor at la Caisse de dépot et placement du Québec(CDP Capital).Nicolas Laporte is a Member of the Investment Analysis and Advise Groupat Citigroup Private Banking. He is involved in portfolio optimization and
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ABOUT THE AUTHORS
asset allocation. He was previously an Analyst with the Equity ResearchGroup at Morgan Stanley Capital International. On the academic side,Nicolas Laporte received his M.Sc. in Banking and Finance from HEC Lausanne (Switzerland).David Kuo Chuen Lee is Managing Director and Chief Investment Officer,Ferrell Asset Management. He holds a Ph.D. in Econometrics from the London School of Economics. He is also a guest lecturer specializing in alternative investments with the Centre for Financial Engineering and Faculty ofBusiness Administration, National University of Singapore.Lionel Martellini is a Professor of Finance at Edhec Graduate School ofBusiness and the Scientific Director of Edhec Risk and Asset ManagementResearch Center. A former member of the faculty at the Marshall School ofBusiness, University of Southern California, he holds Master’s degrees inBusiness Administration, Economics, and Statistics and Mathematics, and aPh.D. in Finance from the Haas School of Business, University of California, Berkeley. Dr. Martellini is a member of the editorial board of the Journal of Alternative Investments and the Journal of Bond Trading andManagement. He conducts active research in quantitative asset management and derivatives valuation, which has been published in leading academic and practitioner journals and has been featured in the FinancialTimes and the Wall Street Journal, and other financial newspapers. He is aregular speaker in seminars and conferences on these topics.L. Joe Moffitt is a Professor in the Department of Resource Economics atthe University of Massachusetts, Amherst. His research interests include theapplication of biology-based, quantitative-based methods to economics andeconometrics. He holds a Ph.D. from the University of California, Berkeley.Kankana Mukherjee is an Assistant Professor of Economics in the Department of Management at Worcester Polytechnic Institute. She received herPh.D. from the University of Connecticut. Her principal research interest isin production analysis and issues relating to mergers, productivity, efficiency, as well as regional differences in competitiveness and productivitygrowth. Her published work has appeared in several peer-reviewed journals.Nicolas Papageorgiou is an Assistant Professor in the Department ofFinance at the Hautes études commerciales (HEC), University of Montreal,Canada. His main research interests and publications deal with fixedincome securities, specifically the pricing of structured products and theanalysis of fixed income arbitrage strategies used by hedge fund managers.
About the Authors
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Dr. Papageorgiou has taught graduate-level courses in Canada and the U.K.and has presented at numerous academic and practitioner conferences inNorth America, Europe, and North Africa.Kok Fai Phoon is Executive Director Designate, Ferrell Asset Management.He holds a Ph.D. in Finance from Northwestern University. Prior to joiningFerrell, he first worked with Yamaichi Research Institute, and subsequentlyat a multibillion-global investment company based in Singapore. He teachescourses on hedge funds, portfolio management and investment at the Centre for Financial Engineering, National University of Singapore, and theSingapore Management University.Stephen E. Satchell is a Reader of financial econometrics at the Universityof Cambridge and specializes in financial econometrics and risk management.He is the editor of Derivatives Use, Trading and Regulation and the Journal of Asset Management, two leading peer-reviewed journals. He also actsas a consultant and academic advisor to a number of financial institutions.Hilary Till is cofounder and Portfolio Manager at Premia Capital Management, LLC, in Chicago, which specializes in detecting pockets of predictability in derivatives markets by using statistical techniques. Ms. Till isalso a Principal of Premia Risk Consultancy, Inc., which advises investmentfirms on derivatives strategies and risk management policy. Prior to Premia,Ms. Till was Chief of Derivatives Strategies at Boston-based Putnam Investments, where she was responsible for the management of all derivativesinvestments in domestic and international fixed income, tax-exempt fixedincome, foreign exchange, and global asset allocation. Prior to PutnamInvestments, Ms. Till was a Quantitative Equity Analyst at Harvard Management Company (HMC) in Boston, the investment management company for Harvard University’s endowment. She holds a B.A. in Statisticsfrom the University of Chicago and a M.Sc. in Statistics from the LondonSchool of Economics. Her articles on derivatives, risk management, andalternative investments have been published in several peer-reviewed academic journals.John P. Townsend is currently Dean of Agriculture and Assistant Professorof Agribusiness at Oklahoma Panhandle State University in Goodwell, OK.Dr. Townsend teaches undergraduate courses in agribusiness, mathematics,and risk management and serves as Rodeo Club advisor in addition to hisadministrative duties. Dr. Townsend obtained his B.S. and M.S. in Agricultural Economics from New Mexico State University, and his Ph.D. in Agricultural Economics from Oklahoma State University.
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ABOUT THE AUTHORS
Mathieu Vaissié is a Research Engineer at Edhec Risk and Asset Management Research Center, where he is in charge of the production of EdhecAlternative Indexes. Mr. Vaissié holds a Master’s Degree in Business Administration from Edhec Graduate School of Business and is a Ph.D. candidatein Finance at the University Paris 9 Dauphine. He specializes in multifactormodels and their use for benchmarking hedge fund returns.Kathryn Wilkens is an Assistant Professor of Finance at Worcester Polytechnic Institute. She received her Ph.D. from the University of Massachusetts at Amherst. Her research analyzes asset allocation and portfolioperformance issues and the bases of relative performance among alternativeinvestment strategies. She is a research associate at the University of Massachusetts’ Center for International Securities and Derivatives Markets andhas published articles in several peer-reviewed journals. In collaborationwith industry experts, she is also on the Chartered Alternative InvestmentAnalyst curriculum committee.
Introduction
O
ne of the key results of modern portfolio theory as developed by Nobellaureate Harry Markowitz in 1952 is that one can obtain a greater number of efficient portfolios by diversifying among various asset classes having negative to low correlation. The performance attributes of the variousasset classes are independent among themselves and are not highly correlated. Commodity trading advisors (CTAs), which typically exhibit low andnegative correlation with stock and bond markets, can help to providedownside protection during volatile and bear markets. CTAs trade managed futures using proprietary trading programs that buy and sell commodities and financial futures on options and futures markets around