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Beating The SG CTA Mutual Fund Index With Managed Futures ETFs

I have a soft spot for CTAs, having worked at a CTA fund of funds for a while, and I’m pleased to see the various data providers’ managed futures indices doing well this year. One thing in CTA-land that has caught my eye in recent months is the launch of a couple of managed futures ETFs; Dynamic Beta Investments partnered with iM Global to launch the iM DBI Managed Futures Strategy ETF and San-Diego based RYZZ Capital launched the RYZZ Managed Futures Strategy ETF. Now that these instruments have been active for a few months, I decided to see how a basket of managed futures ETFs perform against the SG CTA Mutual Fund Index, an equal-weighted group of the largest 10 CTA mutual funds, during the past few months.

I’ve created my managed futures portfolio using First Trust Morningstar’s Managed Futures Strategy ETF, JP Morgan’s Managed Futures Strategy ETF, Proshares Managed Futures Strategy ETF and WisdomTree’s Managed Futures Strategy ETF with the aforementioned new launches. I equal-weighted all of the constituents and set the start date of the portfolio to May 2019, when the DBI ETF launched.

The first thing I notice is that I’m up in the past 4 months, albeit only just. My portfolio turned positive only in August, and has provided me a +1.76% return in that time. That said, I’m lagging the SG CTA Mutual Fund Index significantly, which is up an outstanding +9.68% in the past 4 months.

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One thing I will beat my chest about is that my portfolio is less volatile than the SG CTA Mutual Fund index - my annual deviation is only 7.10% versus 9.48% for the benchmark. I do have a larger max drawdown, however, so on risk-adjusted basis the SG index is really doing great and is hard to beat.

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To try and compete with the SG CTA Mutual Fund Index, I decided to play with the weightings of the ETFs in my portfolio. Looking at the efficient frontier, I can get myself an 0.180 Sharpe ratio and annual returns of +12.81% by allocating almost everything (99.76% of my portfolio) to the DBi product and 0.24% to the JP Morgan product (giving me an average daily return of +0.10%).

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However, no self-respecting portfolio manager is going to leave themselves exposed to one instrument. So, if I put a minimum weighting of 5% per instrument in the portfolio, I can get myself annualised returns of +9.04% - close to the SG CTA Mutual Fund Index - and annualised deviation of +7.93% for a Sharpe of 3.28, which beats the SG CTA Mutual Fund Index's 2.99.

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Since we are looking at historical performance, this exercise is subject to hindsight, of course, but the main point here is not picking the best performing ETF retrospectively. Instead, we wanted to see if we could get exposure to managed futures, and good risk-adjusted returns in the process, from allocating to a basket of managed futures ETFs. Combined with simplified monitoring of real time pricing and ease of access, such vehicles represent a worthy candidate for consideration in a portfolio containing alternative exposure such as hedge funds or CTAs.

I’ll be revisiting this each month to see how my little portfolio is doing. I’ll keep the same constituents and weightings, and see what happens. As always, these blog posts are not investment advice.

Have a good week!

Dmitri Alexeev is Co-Founder of AlphaBot