CTA VAITM (Value Added Index)

The CTA Valued Added Index (CTA VAI™) illustrates the long term benefit of managed futures and provides a valuable CTA diversification index/metric. The index illustrates the risk adjusted added value of including an allocation to managed futures/CTA strategies within a core equity benchmark portfolio. The index highlights that managed futures consistently adds value over the long term and not only in times of financial crisis.

The CTA VAI™ (Valued Added Index) illustrates the benefit of Managed Futures and two core characteristics:

  1. Managed Futures consistently adds risk-adjusted value over the long term, not only in times of financial crisis.
  2. There is a timing aspect to adding or increasing exposure to Managed Futures.
CTA VAITM

2.81

 

 

Figure 1: Risk-Adjusted Value Add of including 10% in Managed Futures


Parameters

  • CTA VAI™ compares the Sharpe ratio of a 90/10 portfolio that has a 10% allocation to Managed Futures versus an all S&P portfolio. Barclays BTOP 50 CTA index is used for the 10% allocation.
  • Index computes the value added difference in Sharpe ratios between the two portfolios on a rolling 60 month basis.
  • A positive number is reflective of the additive risk-adjusted benefit of using Managed Futures within the portfolio.
  • 60 month period captures both up and down cycles in the equity market.
Portfolio Improvement with 10% Managed Futures
Jan. 1996 to
June 2015
S&P 500 Barclay
BT0P50 Index
90/10
Portfolio
Improvement to
S&P 500 Portfolio
Annualized Return 6.4% 5.6% 6.5% +2.2%
Standard Deviation 15.3% 8.4% 13.6% +11.2%
Sharpe Ratio 0.42 0.67 0.48 +14.3%
MAR Ratio 0.12 0.42 0.14 +16.7%
Largest Drawdown 52.6% 13.3% 47.0% +10.5%
Correlation to S&P 500 1.00 -0.11 1.00 NA

Results

  • The CTA VAI™ is generally positive illustrating that whatever the current performance of the CTA benchmark, there is an additive risk-adjusted long term benefit to including Managed Futures within a portfolio.
  • Including 10% Managed Futures to the portfolio has added value in rising and falling equity markets.
  • The 90/10 portfolio has improved the return with significantly less risk. (See Table 1)

Timing

  • When the CTA VAI™ has dislocated the most from the S&P, it has been a valuable time to add CTA exposure.
  • When the CTA VAI™ dipped under 4 and the spread was the greatest, the next 36 months the Barclay BTOP 50 CTA index gained an average of 59.7%. (See 4 grey sections in Figure 1)

Formula

The CTA VAI™ is calculated taking the Sharpe ratio of a portfolio including 90% S&P 500 and 10% Barclay BTOP 50 CTA index (re-balanced annually) minus the Sharpe ratio of the S&P 500 multiplied by 100. Example: Dec. 02: -0.05 minus -0.10 = 0.05 multiplied by 100 = 5.59.

Rolling 60
Months Ending
90% S&P 500
10% Barclay
BT0P 50
Sharpe Ratio
A
S&P 500
Sharpe Ratio
B
CTA VAITM
(A-B) X100
Barclay BT0P
50 Index
Sharpe Ratio
(for reference)
Dec. 2002 -0.05 -0.10 5.59 0.69
Dec. 2004 -0.18 -0.23 5.84 0.72
Dec. 2006 0.45 0.35 9.87 0.90
Dec. 2008 -0.24 -0.32 7.73 0.93
Dec. 2010 0.07 0.01 6.44 0.81
Dec. 2012 0.01 -0.03 3.74 0.29
Dec. 2014 1.02 1.01 1.39 0.48
Correlation
to S&P500
1.00 1.00 -0.11 NA
 

The CTA VAITM (Value Added Index)

Update to June 2015 

 Click to read

Click to read

 
 

Commodity Investing: Alpha, Beta, and Something In Between

Auspice, June 2011 Published Benefits And Pension Monitor