Managed futures, R36

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EOC problem #15, p. 120. “List/Discuss sources of return available to managed futures programs.”
I scratched my head and wrote some BS that would gather 0 pts on the test.
Here’s what the answer key says (in part):
“When returns are segmented according to whether stock/bond markets rose or fell, managed futures have a negative correlation w/cash market portfolios when cash mkt portfolios post significant negative returns and are positively correlated when cash mkt portfolios report significantly positive returns. Therefore, managed futures may offer unique asset allocation characteristics in different market environments.”
I am very confused by this. Is the same as saying managed futures are market-neutral?
 
What I understand from this para is that if you only invest in cash market (long bonds or long stocks), the pay is linear in the sense, the market goes up you get positive returns, market goes down you get negative returns. Straight forward, no confusion here ?
A) Negative corr between mgd futures and cash markets when markets give negative returns. (one goes up; other goes down)
But when you invest in managed futures, due to negative correlation of mgd futures with cash markets, when cash markets go down, your PF with mgd futures goes UP. which is sort of a downside protection.
positive corr between mgd futures and cash markets when markets give positive returns.
Again when you invest in managed futures, due to positive correlation of mgd futures with cash markets, when cash markets go UP, your PF with mgd futures ALSO goes UP. which is good.
In short, Mgd Futures would provide downside protection when cash mkts give -ve returns, and retain upside potential when cash market gives +ve return.
This is what I understood from the para you posted. Hope my understanding is correct.
 
I remember to have read this sometime back:
Managed future and products tracking indices go hand in hand. For a short future position in bear markets, the gain on futures position is the return I can think of. But returns will be negative other way round.
Overall investment in indices and managed futures seem market neutral.
 
Managed futures industry benefits from trends. If markets go up a lot, returns will be positive. If markets go down a lot, returns will be even better. If market trend in a range with sharpe reversals, there will most likely be losses. You can think of managed futures as having long gamma profile (similar to long straddle position, though it’s not quite symmetric as managed futures tend to do best during bearish markets).
 
maratikus:
Thanks but not clear on positive returns irrespective of market goes up or down.. can you please elaborate
 
rp77 Wrote:
——————————————————-
> maratikus:
>
> Thanks but not clear on positive returns
> irrespective of market goes up or down.. can you
> please elaborate
You can go long and short in the futures market. Let’s assume you go long, if market goes up by 10% and short if market goes down by 10%. If market goes up 10% and then down 10%, you will lose money. However, if market goes up 30% or down 30%, you will make money. It’s a simplistic trendfollowing strategy used in managed futures. does that help?
 
derswap07 Wrote:
——————————————————-
> Maratikus,
>
> Actually, you confused me more.
which part is confusing?
 
derswap07 Wrote:
——————————————————-
> All of it
Then I have three questions:
1) Is that pretty clear that a long straddle position will make money if there is a big move in the market (either up or down) and loses if market doesn’t go anywhere?
2) Does it make sense that a long straddle position can be “replicated” by delta hedging? (it’s a little simplistic but close enough)? Such hedge will tend to make money when market moves a lot in one direction and gets chopped (loses money) if markets fluctuate in a range?
3) Trendfollowing component of managed futures behaves as delta-hedge of a long straddle position.
 
maratikus Wrote:
——————————————————-
> derswap07 Wrote:
> ————————————————–
> —–
> > All of it
>
> Then I have three questions:
>
> 1) Is that pretty clear that a long straddle
> position will make money if there is a big move in
> the market (either up or down) and loses if market
> doesn’t go anywhere?
Yes. This is pretty clear.
>
> 2) Does it make sense that a long straddle
> position can be “replicated” by delta hedging?
> (it’s a little simplistic but close enough)? Such
> hedge will tend to make money when market moves a
> lot in one direction and gets chopped (loses
> money) if markets fluctuate in a range?
No. This part is not clear
>
> 3) Trendfollowing component of managed futures
> behaves as delta-hedge of a long straddle
> position.
No.
 
maratikus Wrote:
——————————————————-
> derswap07 Wrote:
> ————————————————–
> —–
> > All of it
>
> Then I have three questions:
>
> 1) Is that pretty clear that a long straddle
> position will make money if there is a big move in
> the market (either up or down) and loses if market
> doesn’t go anywhere?
Yes. This is pretty clear.
>
> 2) Does it make sense that a long straddle
> position can be “replicated” by delta hedging?
> (it’s a little simplistic but close enough)? Such
> hedge will tend to make money when market moves a
> lot in one direction and gets chopped (loses
> money) if markets fluctuate in a range?
No. This part is not clear
>
> 3) Trendfollowing component of managed futures
> behaves as delta-hedge of a long straddle
> position.
No.Not clear at all.
 
Not much. I have gone through the material -at two places-one is when dealer delta hedges the call and second when delta hedge with put. I do understand the concept-I think.
 
maratikus:
I understand long straddle strategy and yes it makes money with extreme market movements either ways and looses when there is not much movement. Also delta hedge adjusts options position with the change in price of the underlying to hedge to position.
Above all is well but can you please correlate managed future with the above..
 
rp77 Wrote:
——————————————————-
> maratikus:
>
> I understand long straddle strategy and yes it
> makes money with extreme market movements either
> ways and looses when there is not much movement.
> Also delta hedge adjusts options position with the
> change in price of the underlying to hedge to
> position.
>
> Above all is well but can you please correlate
> managed future with the above..
http://www.intercontilimited.com/mfutsarchive/mflongvolatility.pdf
 
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