Thursday, May 19, 2016

Four factor model and macro bets for managed futures

What are CTA's thinking about the market? This is not an easy question to answer but using a factor model we can find trends in behavior through looking at their sensitivity to asset class exposures. We use a short-term rolling regression to measure the beta exposures to four factors, equities (SPY), bonds (TLT), currencies (DXY), and commodities (DJP). This will only scratch the surface on what managers are doing, but it provides a good first approximation. We have applied this framework to the SocGen managed futures index of large managers which provides general view of the managed futures strategy.

A close look at the most recent readings shows that the negative sensitivity to commodities is almost completely gone. This is a tilt that had existed for close to two years. On the other hand, the positive beta to the dollar has now switched to a strong short position. Equity exposure has moved to positive territory and is increasing while the strong positive exposure to bonds is starting to fall.

It is hard to directly compare these betas since the volatilities of the asset classes are very different, but the direction and magnitude relative to the past are important indicators. This same framework can be used on individual managers to show their sensitivities to asset classes.

Over longer periods, we have found that the four factor model can explain about 20+ percent of the variation in returns. This is reasonable given that over any short horizon the exposure of the managers may be changing. The dynamic behavior of managers will naturally push asset sector betas closer to zero.

We think this four factor model provides good insight on the behavior of macro managers and the managed futures style. The dynamic nature of managers futures makes it hard to build a passive factor-based index from asset factors, but we can gain better knowledge on manager behavior.

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