Analyzing the performance table
Disclosure documents include performance summaries for managed futures investments. Find out how to decipher the different pieces of information these summaries provide.
FIGURE 1: VAMI Line
The Value-Added Monthly Index (VAMI) shows the performance of a $1,000 investment in a managed futures investment. 10 May 2011 • MANAGED FUTURES TODAY
Upon receiving a Commodity Trading Advisor (CTA) disclosure document, the first thing investors usually do is turn to the performance table found in the Past Performance section of the document. This is where the CTA lists the program's monthly rate of return and aggregate yearly return.
A performance table offers a wealth of data (Table 1); some of the information easily understandable, but most of it needs massaging with additional calculations. Thankfully, there are many CTA databases available that perform the calculations for investors. (Table 2).
One of the most important calculations is also the easiest to grasp: maximum drawdown, which is the percentage loss that a program experiences from its highest net asset value to its lowest value. The maximum drawdown for our sample program (highlighted in red in Table 1), was 11.79% and occurred between April 2004 and February 2005. Figure 1 marks this drawdown on a Value-Added Monthly Index (VAMI) chart, which shows the program's performance in terms of a hypothetical $1,000 initial investment. (The program also had an 11.04% drawdown between April 2009 and January 2010.) While the maximum drawdown is no guarantee that the fund will never experience a larger loss, it is a good indication of potential losses an investor should anticipate.
TABLE 1: SAMPLE PERFORMANCE TABLE
This program's maximum drawdown and recovery period are highlighted red and green, respectively.
An important number missing from most CTA disclosure documents is the corresponding measure to maximum drawdown called Time to Recovery: how long it took the program to earn back the loss. Table 2 lists websites/databases that are helpful in finding this information. It took our sample program nine months (highlighted in green in Table 1) to recover from its maximum drawdown.
Another important element of a CTA's performance is the amount of risk the CTA program takes to earn its returns. There are a number of ways to measure the risk-reward ratio, and again, it helps to use databases, such as the one's found at IASG.com.
©2011 CME Group, Inc
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The information in Managed Futures Today is intended for educational purposes only. It is not meant to recommend, promote, or in any way imply the effectiveness of any trading system, strategy, or approach. Traders are advised to do their own research and testing to determine the validity of a trading idea. Trading and investing carry a high level of risk. Past performance does not guarantee future results.
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Futures trading is not suitable for all investors, and involves the risk of loss. The information in these articles is taken from sources believed to be reliable. It is intended for information and education only and is not guaranteed by CME Group as to accuracy, completeness, nor any trading results. The views and opinions offered by individuals or their associated firms in these articles are solely those of the authors, and do not necessarily represent the views of CME Group.