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The Drawdown Report

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  • Managed Futures Advanced

Whether you are relatively new to Managed Futures or have been investing in them for some time now, a term you should be familiar with is drawdown. Drawdowns are inevitable and should be expected for every investor. That being said, you can choose strategies or different CTAs that fit your risk appetite. By definition, a drawdown is the peak-to-valley decline during a specific time period of an investment (refer to the illustration below). Though, past performance is never a clear indication of future results, drawdown calculations/percentages allows investors and advisors alike, measure the financial risk associated with each CTA. Analyzing drawdown for specific investments, however, is much more than measuring peak-to-valley loss. In this newsletter, we will discuss other key factors that should be considered prior to investing in any one commodity trading advisor or CTA.

Time Horizon

As an industry standard, CTAs report their returns on a monthly basis to all the various database sites. When analyzing the track record of a CTA, an investor is able to identify the largest monthly drawdown along with the maximum drawdown that each CTA has experienced on a month-to-month basis. Although it may seem like measuring drawdown on a month to month time frame is sufficient enough to understand the amount of risk you could expect with a CTAs strategy, shortening the time horizon to evaluate drawdowns on a daily basis will give you a better understanding of their volatility and risk.  Analyzing a CTAs largest intra-month and daily drawdown requires further due diligence and receiving daily returns from the CTA.  The reason why analyzing drawdowns on a intra-month (or daily) basis is important, is because many times looking at drawdowns monthly does paint the clearest picture.  For example, let's say your analyzing a CTA's track record, and you see that the largest 1-month loss that they experienced was -5.0%.  The -5.0% was what the CTA ended the month with, and that is why it is reported as the monthly loss, but, what if the CTA was in fact -10% in the middle month, and ended up recovering 5% of the losses to end the month -5%? By looking at a monthly track record, an investor would never know that the CTA was actually down as much as -10% - this information can only be uncovered by doing deeper due diligence.

Recovery Period

The second item to assess while analyzing drawdowns is the time that it takes to recover from each drawdown.  Every CTA, during their course of managing customer funds will experience multiple drawdowns, but how quickly they recover out of their drawdown is a statistic that is commonly overlooked from an investor standpoint. When analyzing a CTAs drawdown sequence, it is important to take an in-depth look at the drawdown report. The drawdown report can be found on the second page of our 3-pager, which is offered on our database for each program that is listed (see example snapshot below). Here, it will list all of the CTAs drawdowns that they experienced during their track record from the largest to the smallest. Also included in the drawdown report you will find the length of the drawdown, how long it took to recover from the drawdown and the starting and ending dates of the drawdowns. In short, the drawdown report allows investors to see the depth of each drawdown, but more importantly, it shows how long it took the CTA to recover from each one of those drawdowns.

 

Drawdown Report

 

No. 

Depth (%)

Length (Months)

Recovery (Months)

Start date

End date

1

-25.07

1

-

01/2011

 01/2011

2

-13.92

2

3

11/2009

 12/2009

3

-11.61

1

3

07/2010

 07/2010

4

-8.15

1

4

04/2009

 04/2009

5

-5.25

1

3

09/2008

 09/2008

 

Drawdown Depth

The last item that is crucial to observe when analyzing a CTA's drawdowns, is the depth of their drawdowns relative to their annual rate of return. Generally speaking, when analyzing CTAs, we look for the maximum drawdown (largest peak to valley loss since inception) to be no more than half of the annualized rate of return.  For example, if a CTA is annualizing approximately 30% in their strategy, we would like the maximum drawdown to be no greater than 15%. It is important to keep in mind that the 2:1 ratio between annualized rate of return and maximum drawdown can vary from CTA to CTA depending on their risk to reward approach and this information should be taken with a grain of salt. There will always be those "black swan" events or outlying months that might skew a CTAs statistics, but those should be analyzed on a case to case basis and the events causing the drawdown should be analyzed in greater detail.

In short, it is important to understand that past performance is never a clear indication of future results and drawdowns should be expected over the course of a managed futures investment. The drawdown report of individual CTAs should be analyzed very carefully, allowing investors to quantify the amount of risk they can potentially expect over a specific period of time. Although investors cannot predict the future and foresee drawdowns, analyzing a CTA's historical drawdowns can offer a ballpark number of the type of drawdown percentage you may experience in the future.

 

-Paul Kokuzian

Managing Partner, aiSource

Disclaimer: Past performance is not indicative of future results. Futures trading involves substantial risk of loss.  By no means is this newsletter offering any investment advice or suggesting to make any trade recommendations. Please consult an aiSource advisor prior to opening any managed futures accounts.

Disclaimer: Past performance is not indicative of future results. Futures trading involves substantial risk of loss and may not be suitable for everyone. By no means is this newsletter/blog post offering any investment advice or suggesting to make any trade recommendations. Please consult an aiSource advisor prior to opening any managed futures accounts.


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Past performance is not necessarily indicative of future results. Trading commodity futures, options, and foreign exchange ("forex") involves substantial risk of loss and is not suitable for all investors. In no way is the advisor of the month a direct recommendation of aiSource or any of its affiliates. Please carefully review the disclosure documents and any other promotional material prior to investing with any program. Managed accounts and/or managed futures are very risky and may not be suitable for all investors. Please consult with a Managed Futures specialists prior to investing.