How should an investor compare a CTA strategy they are considering investing with?
How should a manager that is looking to market and promote his/her strategy to investors compare their strategy to other’s?
These are common questions we receive from both our investors and the commodity trading advisors that we speak with. With a vast number of Indexes available in the investment world it can be a cumbersome task to measure performance accurately. The use of indexes is twofold: investors use it as a metric to compare performance, and to find strategies that can add value to their existing portfolio. From a CTA perspective, it allows them to show how their strategy performs versus their peers. Although it shouldn’t be the one and only metric used to consider an investment, it provides clarity on how your investment would have performed had you invested in something else. We wanted to provide a brief list of the most commonly used indexes in the managed futures space in comparing performance against one another.
S&P 500 Index (download data)
The most vastly used index in the managed futures space is the S&P 500 index. The S&P 500 index is based on the market capitalizations of 500 large companies listed on the NYSE and the Nasdaq. It is one of the most commonly followed equity indices, and many consider it one of the best representations of the U.S. stock market, and a predictor for the U.S. economy. Although the performance of the S&P 500 is based on 500 stocks, many investors like to consider past performance of CTA strategies and match it against how the S&P 500 performed as a hypothetical display of how their investment would have grown in comparison to investing in stocks.
Barclay CTA Index (view information)
The Barclay CTA index is designed to represent the performance of all the strategies within the database, however for a manager/program to be included they must have a minimum of a four-year performance track record. Additional programs introduced by qualified managers (managers who have at least one program that meets the four-year history requirement) must have at least two years of performance history.
The list of managers included within the index is comprised each year, assuming they meet the four-year performance at the end of the prior year. At the beginning of each year a hypothetical portfolio is formed with each of the managers that qualify receiving an equal weighting. The index monthly return is the hypothetical returns of this portfolio of managers. There is no rebalancing of allocations throughout the year.
Barclay BTOP 50 (download data)
The Barclay BTOP 50 represents the performance of the CTA strategies that make up the top 50% of the total assets of all the CTAs in the Barclay Hedge CTA database. For CTAs to be included in the index, their program must be open to new investment, must report daily data, must have two years of performance history, and the CTA must have at least three years of operating history.
Each calendar year, the selected trading advisors represent, in aggregate, no less than 50% of the investable assets of the Barclay CTA Universe. Barclay’s BTOP50 index is equally weighted among the selected programs at the beginning of each calendar year and is rebalanced annually.
Barclay Systematic Traders Index (view information)
The Barclay Systematic Index is used to represent the performance of CTA strategies in the Barclay Hedge database whose strategy is at least 95% systematic. For a CTA manager to be included within the index, it must be at least 95% systematic and have a minimum of a two-year performance track record.
To be included in the index the CTA strategy must meet both above requirements at the end of the prior calendar year. At the start of the year a hypothetical portfolio is formed with all the managers that qualify and an equal weighting is set to each. The monthly performance of this portfolio is the monthly returns for the index. No rebalancing is done throughout the year and allocations remain static.
Barclay Agriculture Traders Index (view information)
The Barclay Agriculture Traders index is the index most formally used to compare and monitor the performance of CTA managers strictly trading the Agriculture sector.
To be included within the index a CTA manager but strictly be an Agriculture trader without exposure to any other sector. This index is comprised of all the Agriculture only managers in the Barclay Hedge database, and the only requirement is that you had to be listed in the prior year. At the start of each year a hypothetical portfolio is created with an equal weighting to each manager. The monthly return of this hypothetical portfolio is the monthly return for the index.
Various Barclay Hedge Indexes
Barclay Hedge has many other indexes available for both investors and CTA’s that are not as popular, but still very useful. Here is a page outlining them all, click here.
SG CTA Index (formerly the NewEdge Index) (download data)
The SG CTA index is an index comprised of the 20 largest CTA strategies listed on the SG CTA database. To be included in the index, a CTA manager must be open to new investment and must report daily data.
At the end of each year, the CTA’s in the SG CTA database are ranked by programs assets and the 20 largest that meet the above requirements are included in the index. At the start of the new year a hypothetical portfolio is created with each of the 20 managers receiving an equal allocation. The monthly return of the hypothetical portfolio is the monthly return of the index, no rebalancing or changes are made throughout the year.
SG CTA Trend Index (download data)
The SG CTA Trend index is an index comprised of the 10 largest trend following CTA strategies listed on the SG CTA database. To be included in the index, a CTA manager must be open to new investment, must report daily data, be an industry recognized trend follower and exhibit correlation to trend following peers and the SG trend indicator.
At the end of each year, the CTA’s in the SG CTA database are ranked by programs assets and the 10 largest that meet the above requirements are included in the index. At the start of the new year a hypothetical portfolio is created with each of the 10 managers receiving an equal allocation. The daily return of the hypothetical portfolio is the daily return of the index, no rebalancing or changes are made throughout the year.
Altegris 40 Index (download data)
The Altegris 40 Index is an index comprised of the 40 largest CTA strategies (based on program assets) listed in the Altegris CTA database. Every month all programs in the Altegris database are ranked by program assets then the 40 largest are taken to make up the Altegris 40 index. The index return for the month is the asset weighted average return of those 40 programs. Many CTA’s and investors will use this index to see what the performance of the largest CTAs in space has been.
As you can see there are many distinct types of CTA indexes used within the managed futures space. Whether you are an investor or a CTA, using an index that relates closely to the strategy you are analyzing is important in your research process. For example, if you are considering investing in a CTA strategy that is predominantly systematic, then you would most likely compare that strategy to the Barclay Systematic Traders Index or if you are looking to invest in a Ag only trader, then comparing the strategy to the Barclay Agriculture index would make the most sense. It is important to compare CTA strategies that are similar to one another to get the most accurate depiction. On the aiSource CTA database, the two most commonly used indexes are the S&P 500 and the Barclay CTA Index.