Optimal Embedded Leverage for Portfolios of Commodity Trading Advisors

The chapter evaluates the profit when investing in portfolios of Commodity Trading Advisors (CTA) with optimal embedded leverage. The authors’ results support their expectation that it is possible to improve the long-term profitability of diversified CTA portfolios by obtaining optimal embedded leverage, but the improvement in profitability varies across CTA indexes. In addition, the crisis alpha feature of CTAs are considered and it is shown that diversified portfolios of CTAs can achieve a much larger crisis alpha by using optimal leverage factors. Optimal embedded leverage can also a useful tool in managing and evaluating the leverage of trend-following strategies and CTA portfolios.

Effect of Speculators’ Position Changes on the LME Futures Market

This paper employs Granger causality tests to analyze the role of speculators using weekly COTR (commitment of traders reports) data covering the period of August 2014 to July 2017. The paper presents statistically significant evidence that the position changes of speculators, such as hedge funds and CTAs (commodity trading advisors), unidirectionally Granger-cause the prices of base metals, such as aluminum, copper, and zinc. This finding is a result of causality going from the levels of net futures positions of money managers to futures price changes on the London Metal Exchange (LME). However, producers’ and swap dealers’ speculative roles in price-formation are rejected in Granger causality tests. This paper presents clear results with important market implications.

Commodity Trading Advisors and Managed Futures

Managed futures strategies provide investors with a dynamic exposure to commodities. Among other ways of investing in them, commodity trading advisors (CTAs) have become synonymous with this asset class, as they provide professional money management services using derivatives markets either in a pooled or individual setting. Most managed futures strategies display trend-following and momentum-type systematic trading features, which result in adopting a long-short portfolio approach. This chapter explains the characteristics and the growth of this commodity investing industry and provides an extensive literature review. Much of the literature finds that managed futures investing through CTAs provides excellent diversification benefits and performs well, especially in crisis times. Conversely, the non-uniformity of the databases and indices used in these studies lead to several biases. Some recent studies that directly address these shortcomings question the performance persistence of CTAs after fees.