12/22/2016 RedRockJustPublishedReportAboutTheTrendFollowingLandscape&HowCTAsPerformanceMustBeAnalyzedOctafinance

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RedRockJustPublishedReportAboutThe
TrendFollowingLandscape&HowCTAs HedgeFundNews
PerformanceMustBeAnalyzed
Top10CITADELADVISORS13FHoldingsin
Q32015
07/24/2015BYOCTAFINANCEINCTANEWS

DFDENT&COINCJustReleasedItsQ3
2015StockPositions

Background MAVERICKCAPITALTop10HoldingsinQ3
2015
Trendfollowingisthemostprevalentstrategyutilizedthroughoutthemanaged
futuresindustry.Over22monthsago,duringthetoughestrecessionourindustry AnalyzingKenGriffinsCITADELADVISORS
haseverexperienced,wepublishedtheoriginalversionofthispapertooffera StockHoldingsinQ32015
transparentandintellectuallyhonestupdateonthetrackrecordsofmanyofthe
mostwellknowntrendfollowers.Atthattime,alltwentymanagersincludedinour LONEPINECAPITALTop1013FPositionsin

analysis,includingourSystematicGlobalMacro(systematictrendfollowing) Q32015

programandallofthemajorCTAindexes,wereinadrawdownofftheiralltimehigh
watermarks.
GuruNews
AsCentralBankpoliciesbegantodiverge,beneficialvolatility(i.e.directionaland FelixZulaufSeesaStockMarketCorrection
sustained)begantomanifestitselfinmanyofthefuturesmarketsthatarethecore Coming.ThisRallyS&P500(INDEXSP:.INX)
ofmosttrendfollowingCTAsportfolios.Mosttrendfollowerswereabletocapitalize WillBeShortLived
onthesefavorablemarketconditions,withthebestperformingmanagersproducing
alltimenetnewequityhighs,andinmanycases,andthensome. MarcFaberSharesHisInsightinOneHour
ExclusiveInterview.HeCoversAllFrom

AsoftheendofMay2015,theapproximately$74billionofmanagerassetsunder CommoditiesandChinatoInflation,The
EuroandGold
managementthatconstitutetheNewedgeTrendIndexwasup2.49%yeartodate
and4.77%intodrawdownoffitsmostrecenthighwatermark.
JimGrant:TheNextThingMightBe
HelicopterMoney.WhattoBuyandWhere
Thequestionremainsthesameasweposedintheoriginalversionofourpaper:
HeSeesInvestmentOpportunities
whatisthebestwaytoobjectivelyanalyze,measure,andcomparetheperformance
ofagroupoftrendfollowingCTAs? KyleBassBearishonEmergingMarketsfor
atleast2MoreYears.LookingtoShort
Tohelpanswerthisquestionwedevelopedourownmetricthatmeasuresand Currencies
comparesthegoodnessofsimilarmanagersreturns.Thispaperupdatesour
originalwork(andsubsequentversionsthatwerepublishedinSeptember2014and DavidTepperGetsDefensive.IsitTimeto

May2015)andthemeasurementsandrankingmethodologythatweinitially GetOutofTheStockMarket?

introducedremainthesame.

MacroNews
Whowasanalyzed?
ChinaMarginDebtHits8WeekHigh,Japan
Thisupdatedversionofourpaperincludesanalysison19ofthe20trendfollowing PumpsnDumpsAsKyleBassFearsLooming
managersthatweinitiallystudied(onecloseddown),plusweincludetheNewedge EMBankingCrisis
CTAIndex,theNewedgeTrendCTAIndex,theNewedgeTrendIndicator,andan
additional4managers.ItisimportanttonotethattheNewedgeCTAIndex AreUSRussianRelationsAZeroSum
representstheequalweightedperformanceofthetop20largestdiversifiedCTAs Game?
openforinvestment,theNewedgeTrendCTAIndexrepresentstheequalweighted
performanceofthetop10largesttrendfollowingCTAopenforinvestment,andthe USandRussiahavelauncheddirecttalkson
theconflictinSyria

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12/22/2016 RedRockJustPublishedReportAboutTheTrendFollowingLandscape&HowCTAsPerformanceMustBeAnalyzedOctafinance

NewedgeTrendIndicatorisafullydisclosed,rulebasedtrendfollowingstrategythat
YuanDropsasPBOCCutsReferenceRateby
offersaninterestingandtransparentlookintothedailyperformanceandpositions
MostSinceDevaluation
ofaprofessionallydeveloped,albeitbasic,trendmodel.

Couldthemarketcrashlike1987?put
CommonMisunderstandings volumespikeargueslowisnear

Twoofthemanagersweincludeinouranalysis,onethatwespecificallyaddedto
helpmakeanimportantpoint,receivedaccoladesfortheirimpressive,outsized CTAsNews
performanceduring2014:MulvaneyCapitalManagementmade+67.38%andISAM
produced+61.95%.However,theproblemis(andthisisafact,notjustour RedRockJustPublishedReportAboutThe
opinion),reportingonlythesetypesofreturnnumberstellsonlyhalfofthestory. TrendFollowingLandscape&HowCTAs
Whenyouhearamanagersperformancebeingquoted,thefirstquestionsomeone PerformanceMustBeAnalyzed

shouldaskis,Atwhatlevelofrisk/margintoequity/volatility?ACommodity
HowtoImplementDualMomentumfornon
TradingAdvisormakesasubjectivechoiceastowhatlevelmargintoequityto
USInvestors
operatehisorherprogrambutthelevelchosenisnot,inandofitself,asourceof
goodness.Furthermore,aninvestorwhoopensamanagedaccountwithaCTA,
DoCommodityTradingAdvisors(CTAs)
throughtheuseofnotionalfunding,canmodifythemanagersregularprogram
ReallyProvideCrisisAlpha,EquityHedge
volatilitytosuittheirownappetiteforrisk.Therefore,duetotheinherentleverage andAreLongVolatility?
(i.e.freenocosttoleverupunlikestocks)foundinthefuturesmarkets,risk
adjustedreturns(notabsolutereturns)aretheonlyaccurateandproperwayto
comparesimilarmanagers

Thispointisrepeatedlymisunderstoodbymanyinthemanagedfuturesindustry.A
programrunwithahighermargintoequityratiowillproduceahighercompound
rateofgrowthatthepriceofhigherdrawdowns(periodsofloss).Forexample,
assumeonemanagerproducesa+60%netreturnover12monthsandanother
manageronlyproducesa+20%netreturn.Ifthesecondmanagerusedonly1/3as
muchmargintoequity,andproducedonly1/3asmuchvolatilityinhisreturns,then
thetwomanagersperformancewereessentiallyequalonariskadjustedbasis.
However,thefirstmanagerwilloftenwinawardsandbetoutedforhavingbetter
performancewhichdemonstratesalackofunderstandingof,oratleastalackof
concernfor,acrucialaspectaboutmanagedfuturesandhowtocorrectlymeasure
performance.

Tobringthispointfullcircle,whileMulvaneys+67.38%andISAMs+61.95%
performancein2014indeedsoundimpressiveonthesurface,astudyoftheirtrack
recordsshowsthattheformerlostover35%inonerecentcalendaryear(andlistsa
45.04%maximumhistoricaldrawdown)andthelatterlostmoneyinthree
consecutiverecentcalendaryearsandlistsa34.79%maximumdrawdown.Both
managersrecentlymadealltimenetnewequityhighs,forwhichtheyshouldbe
commended,however,inordertogetanintellectuallyhonestandaccuratereading
oftheirtrueperformance,onemustincludedataonbothreturnsandriskinones
analysis.

RankingMethodology
Ourproprietarymetricaimstostepintotheshoesofaloyal,longterminvestorwith
anyofthemanagersthatweanalyze,andasks,WhataspectsofmyCTAmanagers
performancearemostimportanttome?Thefollowingtableconveysthemost
importantaspects,theproxiesweusetomeasurethem,andtheweightwegiveto
eachmeasurementinourweightedfinalranking:

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12/22/2016 RedRockJustPublishedReportAboutTheTrendFollowingLandscape&HowCTAsPerformanceMustBeAnalyzedOctafinance

FortheperiodsincetheinceptionofourSystematicGlobalMacroprogramin
September2003throughMay2015,wemeasureeachaspectofthemanagers
returnsviaourproxiesandthenassignthemaweightsimilartohowonecalculates
agradepointaverage.

Oncewehavetherankingsforeachofthemanagersontheindividualaspects,we
thencombinetherankings(attheirrespectiveweights)toarriveatafinalrank.This
isastraightforward,quickmethodtocomparesimilarfuturesmanagerstoone
another.Bydesign,andtoreducethecomplexityoftheprocess,therankingsdonot
haveproportionalinformationembeddedinthem,i.e.howmuchbetterisManagerA
thanManagerB,etc.Whenconsideringtheresultsofourrankingpresentedinthe
tableonthenextpage,thefollowingshouldbenoted:

SinceaCTAsreturns,volatility,anddrawdownsarefunctionsofasubjective
decisionthathasbeenmadebythemanager,onlyanalyzingthemanagerslength
anddepthoftheircurrent(ifapplicable)drawdownisnotsufficient.Ariskadjusted
metric(referredtoasRewardtoRiskRatiointheforthcomingtable)mustbe
appliedthatnormalizesmanagersreturnsagainstoneanother.
Asweconveyinourwhitepaper,Sortino:ASharperRatio,theSortinoratioisa
moreappropriatemeasuretouseforthispurposethanthemorepopularSharpe
ratio.ThisisbecausetheSharperatio,byassumingthatthereturnsitismeasuring
arenormallydistributed,unfairlyandincorrectlypenalizesmanagerswhosereturns
exhibitpositiveasymmetry(skewness).Inreality,investorstypicallywelcome
upsidevolatilityandperceiveonlydownsidevolatilityasactualrisk.

TheRanking

Observations&commentsabouttheresults:
RedRockCapitalsSystematicGlobalMacroprogramovertookWintonforthe#1

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12/22/2016 RedRockJustPublishedReportAboutTheTrendFollowingLandscape&HowCTAsPerformanceMustBeAnalyzedOctafinance

overallranking.
65%oftheCTAsandindexesanalyzedareorwereattheiralltimenetnewequity
highwithinthepasttwomonths.Amanagermakinganalltimenetnewequity
highsis,bydefinition,notinanydrawdown,andthisgivesthemahighrankingin
bothofthefirsttwocategoriesasitshould.
Strangelythereisstillnearly$2billioninvestedwithmanagersinthebottom
quartileofthefinalranking.Despitesignificantlyimprovedtrendfollowing
conditions,someofthosemanagershavenotproducedanetnewequityinnearly6
years.
TheNewedgeTrendIndicator,afullydisclosedandfreelyavailabletothepublic
strategy,hasoutperformedthreepopularCTAtrendfollowingmanagers.Asa
caveat,though,theTrendIndicatorwaslaunchedinAugust2010soonlyits
performancesince,andnotbeforethattime,canbeconsideredoutofsample.
Aninterestingrelatedexercisetoourobjectiverankingmethodologyisto
subjectivelystudyandranktheattractivenessofeachofthemanagersVAMIs/
growthcurvesthroughoutourstudyperiod.WefoundthatWintonwinsinthis
category.
Goodrecentperformance,assomanyseemtofocusonandrewardwithpraise,
needstobekeptinthecorrectperspective.Forinstanceamanagercouldbeup
10%oneyearandthenupanother5%thefollowingyear(andwinawards,etc.)
thendown11%,andbackup8%yettheentiretimestillbeundertheirhigh
watermark.Shouldasavvy,loyalinvestor,whohasnotexperiencedanetnew
equityhighin66+months,reallycareifamanagerisupthisyeartodate?We
arguethattheyshouldnot.
Consideringthelengthofsomeofthemanagersdrawdowns,especiallyfactoringin
thefruitfultrendfollowingenvironmentthathasbeeninplacesincelate2013,we
believeconcerniswarranted,fromacurrentorprospectiveinvestorstandpoint,as
towhetherornotsuchmanagerswillevermakeanothernewequityhighagain.
Unfortunately,asweveseentoomanytimesbeforeinourindustry,thosemanagers
oftensharethesameconcernandconvenientlytrytoshiftfocusawayfromthat

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12/22/2016 RedRockJustPublishedReportAboutTheTrendFollowingLandscape&HowCTAsPerformanceMustBeAnalyzedOctafinance

particularprogramonlytolaunchanothernewandimprovedvariant.
Prospectiveinvestorswoulddothemselvesafavorbybeingskepticaloffirms
launchingnewprograms,MutualFunds,andETFsinthewakeofailingflagshipCTA
programs.

Inthisarticlewepresentanefficientandstraightforwardmethodtoobjectively
measureandcomparetheperformanceofsimilartrendfollowingCTAmanagers.
Sincelate2013,manyofthemanagersinouranalysis,alongwiththemajorCTA
indexes,haveproducedimpressiveriskadjustedreturns.Withallthatishappening
globally(e.g.FEDQ.E.programending,possibleGreekexitfromEuro,negative
interestrates,equitiesandbondsnearalltimehighs)itwillbeinterestingtosee
whatkindofmarketenvironmenttrendfollowerswillhavetoworkwithinthe
comingmonthsandyears.

ThomasN.Rollinger,ManagingPartnerScottT.Hoffman,Partner

Appendix[NEW]
Theperiodofanalysispresentedinthemainbodyofthepaperisnearly12yearsin
length.Wethoughtreadersmayalsobeinterestedinseeingashorterperiodof
comparison.Thetableonthefollowingpageranksallofthemanagersandindexes
ontworiskadjustedmetrics,theSharperatioandtheSortinoratio,overthepast
36months.Sincewithbothratioshigherisbetter,onecanattainaquick,
normalizedlookacrossmanagersofthesameilkbyaddingthetworatiostogether
andthensortingfromhighesttolowesttoachieveasuccinctranking.

ImportantDisclosures
Thisdocumentisforinformationalpurposesonlyanditisnotasolicitationfor
investment.Pastresultsarenotnecessarilyindicativeoffutureresults.An
investmentwithanyCommodityTradingAdvisorshouldonlybemadeaftercareful
studyoftheadvisorsDisclosureDocumentincludingthedescriptionofthe
objectives,principalrisks,charges,andfeesassociatedwithsuchaninvestment.

AboutRedRockCapital
RedRockCapitalisanawardwinningcommodityinvestmentmanagementfirm
locatedinChicago.Duringthesummerof2015RedRockwillproudlycelebrateits

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