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More than 10 years ago, while working as Director of Managed Futures for a major international banking organization, Emil van Essen, who is now the President of Abacus Fund Management, LLC (“Abacus”) observed that many of the investment funds that had allocated capital to a portfolio of the top performing CTAs of the day were paradoxically generating sub par performance.
After much testing, he discovered that most such CTA portfolios were constructed with heavy reliance on managers with high Sharpe ratios, low correlation of returns and lengthy track records. One thing, however, seemed clear: the then-current methodology did not work. Regardless of how successful the CTA’s had been to date, how much due diligence was performed and how thorough the analysis of each CTA’s results, the performance of the CTA portfolio was, at best, unremarkable. And yet even today, many years later, most funds are still constructed in exactly the same way.
If traditional measures are poor predictors of future CTA performance, then how can an investor identify who next year’s star performers will be? Perhaps more importantly, how can investors avoid those CTA’s who will collapse and disappear in a sea of red ink?
After many years of work at solving this complex puzzle, Abacus and its team of professional software developers have made a significant breakthrough which allows us to combine CTA-specific performance data with an analysis of general market conditions in a model that predicts who the best and worst performing CTA’s will be for the next 12 months.
THIS COMPOSITE PERFORMANCE RECORD IS HYPOTHETICAL AND THESE TRADING ADVISORS HAVE NOT TRADED TOGETHER IN THE MANNER SHOWN IN THE COMPOSITE. HYPOTHETICAL PERFORMANCE RESULTS HAVE MANY INHERENT LIMITATIONS, SOME OF WHICH ARE DESCRIBED BELOW. NO REPRESENTATION IS BEING MADE THAT ANY MULTI-ADVISOR MANAGED ACCOUNT OR POOL WILL OR IS LIKELY TO ACHIEVE A COMPOSITE PERFORMANCE RECORD SIMILAR TO THAT SHOWN. IN FACT, THERE ARE FREQUENTLY SHARP DIFFERENCES BETWEEN A HYPOTHETICAL COMPOSITE PERFORMANCE RECORD AND THE ACTUAL RECORD SUBSEQUENTLY ACHIEVED.
ONE OF THE LIMITATIONS OF A HYPOTHETICAL COMPOSITE PERFORMANCE RECORD IS THAT DECISIONS RELATING TO THE SELECTION OF TRADING ADVISORS AND THE ALLOCATION OF ASSETS AMONG THOSE TRADING ADVISORS WERE MADE WITH THE BENEFIT OF HINDSIGHT BASED UPON THE HISTORICAL RATES OF RETURN OF THE SELECTED TRADING ADVISORS. THEREFORE, COMPOSITE PERFORMANCE RECORDS INVARIABLY SHOW POSITIVE RATES OF RETURN. ANOTHER INHERENT LIMITATION ON THESE RESULTS IS THAT THE ALLOCATION DECISIONS REFLECTED IN THE PERFORMANCE RECORD WERE NOT MADE UNDER ACTUAL MARKET CONDITIONS AND, THEREFORE, CANNOT COMPLETELY ACCOUNT FOR THE IMPACT OF FINANCIAL RISK IN ACTUAL TRADING. FURTHERMORE, THE COMPOSITE PERFORMANCE RECORD MAY BE DISTORTED BECAUSE THE ALLOCATION OF ASSETS CHANGES FROM TIME TO TIME AND THESE ADJUSTMENTS ARE NOT REFLECTED IN THE COMPOSITE.
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