the simple truth behind managed futures
TRANSCRIPT
The Simple Truth Behind Managed
Futures & Chaos Cruncher
Presented by Quant Trade, LLC
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Risk Disclosure Statement
The risk of loss in trading commodity futures contracts can be substantial. You should therefore carefully consider whether such trading is suitable for you in light of your financial condition. You may sustain a total loss of the initial margin funds and any additional funds that you deposit with your broker to establish or maintain a position in the commodity futures market. Past performance is not indicative of future results. We recommend that you learn more from the Commodity Futures Trading Commission (CFTC) or the National Futures Association. Trading Securities: In considering whether to trade in securities or enter into any such transaction, you should be aware that trading in securities can be extremely risky. You should be prepared to lose all of the funds used for trading in securities. You should not fund your security trading activities with retirement savings, emergency funds or funds set aside for purposes such as education or home ownership. Trading in securities can also lead to large and immediate financial losses. Trading in securities requires knowledge of the securities markets. Trading in securities require in-depth knowledge of the securities markets and trading techniques and strategies. In attempting to profit through trading in securities, you must compete with professional, licensed traders employed by securities companies. You should have the appropriate experience before engaging in the trading of securities. All losses are your responsibility. Hypothetical Risk Disclosure Statement: "Hypothetical performance results have many inherent limitations, some of which are described below. No representation is being made that any account will or is likely to achieve profits or losses similar to those shown. In fact, there are frequently sharp differences between hypothetical performance results and the actual results subsequently achieved by any particular trading program. One of the limitations of hypothetical performance results is that they are generally prepared with the benefit of hindsight. In addition, hypothetical trading does not involve financial risk, and no hypothetical trading record can completely account for the impact of financial risk in actual trading. For example, the ability to withstand losses or to adhere to a particular trading program in spite of trading losses are material points which can also adversely affect actual trading results. There are numerous other factors related to the markets in general or to the implementation of any specific trading program which cannot be fully accounted for in the preparation of hypothetical performance results and all of which can adversely affect actual trading results."
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What is a Futures Contract?
A Futures contract is an agreement made today between a buyer and a seller who are obligated to complete a transaction at a date in the future.
The buyer and the seller do not know each other. The "negotiation" occurs in the fast-paced frenzy of a futures pit
or an electronic exchange.
The terms of a futures contract are standardized.
What to trade; Where to trade; When to trade; How much to trade; what quality of good to trade—all standardized under the terms of the futures contract.
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What is a Futures Contract
(continued)?
The price at which the trade will occur is determined "in the pit or electronic exchange."
This price is known as the futures price.
No one faces default risk, even if the other party has an incentive to default on the contract.
The Futures Exchange where the contract is traded guarantees each trade—no default is possible.
To cancel the contract, an offsetting trade is made "in the pit or electronic exchange."
The trader of a futures contract may experience a gain or a loss.
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What are Managed Futures?
Managed futures are futures positions entered by a Professional money manager for clients. These managers are known as commodity trading advisors (CTA) or commodity pool operators (CPO). Managers can invest in a large number of markets, including:
Energy (Crude, Unleaded Gasoline, Natural Gas, etc…)
Agriculture (Corn, Wheat, Soy Beans, Live Cattle, etc…)
Currencies (Euro, Yen, Swiss Franc, Canadian Dollar, etc…)
Equities (S&P 500, Dow, Nasdaq, Russell 2000, and others)
Managers use a variety of trading methods depending on their expertise. Most of these are fundamentals, technical analysis, arbitrage or algorithmic. In many cases it is a combination of some or all of these.
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Growth of Managed Futures?
Trade Like A Quant
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When Stocks Perform Poorly
The study below, published by CME Group in their brochure, Lintner Revisited: The Benefts of Managed Futures 25 Years
Later, supports the famous landmark study by the late Harvard University professor Dr. John Lintner. In his study Dr. Lintner concluded that managed futures can increase the performance and reduce the risk in an overall investment portfolio. It is important to note the study below is not based on academic theory. It is based on actual performance statistics of the S&P 500 and the BTOP50. The BTOP50 Index seeks to replicate the overall composition of the managed futures industry with regard to trading style and overall market exposure. The BTOP50 comprises the largest trading advisor programs, as measured by assets under management.
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BTOP50 Under Crisis
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Robust Diversification
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So Why Do Managers Use
Futures?
A futures contract represents a zero-sum game between a buyer and a seller.
Gains realized by the buyer are offset by losses realized by the seller (and vice-versa).
The futures exchanges keep track of the gains and losses every day.
Futures contracts are used for hedging and speculation.
Hedging and speculating are complementary activities.
Hedgers shift price risk to speculators.
Speculators absorb price risk.
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Managed Futures
Managed futures add real diversification to a portfolio:
Futures represent potential hedges against such factors as business cycle movements and inflation or deflation risk.
CTAs & CPOs often target many markets using multiple strategies. CTAs & CPOs can buy and sell futures, write or purchase options,
and speculate in bull or bear markets. They do not need to pursue a single view as a bull or a bear.
Foreign exchange and financial index futures allow for global diversification without the need for a fine-grained focus on several thousand stocks or bonds worldwide.
By their very nature commodities are dependent upon global factors. These characteristics make managed futures diverge from major
markets, unlike certain hedge fund strategies.
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Managed Futures Reduce Risk
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Futures Markets are not a Casino
Futures markets are not the “casinos” many believe them to be. Rather, they act as insurers, like Lloyd’s of London or Swiss RE. But unlike traditional insurance, futures have long traded in centralized venues. In these futures exchanges, risk can be passed on by those who seek price stability – such as farmers or oil companies – to others who are willing to take on this risk in order to generate profits.
Cattle producers hedge the price of Cattle by locking in a
certain price for delivery at a future date. Meat processors use the futures contract to ensure they get
an adequate supply of cattle products. Many people who are unaware of futures benefit from the steady,
reliable and reasonably-priced supply of goods and services created by this mechanism.
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Hedging A Stock Portfolio
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Algorithmic or “Systems” Trading
"Trading Systems" are technical analysis based computer models which generate specific buy and sell signals in one or more futures markets by analyzing historical and real time price data. Systems guarantee your trading decisions are consistent and disciplined by making them for you automatically.
Example: A simple example of a trading system would be the following 'trading rules' 1. If the current market price is higher than the 200 day Moving Average
- Buy at market.
2. If the position is losing more than $500, - Sell at market.
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Why “Quant Trade” Uses Chaos Theory and
Fractals in Trading
Markets are a function of nonlinear human activity
Technical traders are at a
disadvantage because traditional technical analysis techniques are based upon linear equations and Euclidean Geometry
Most analysis techniques cannot
quantify nonlinear noise and attempt to merely filter it out
Market reversals are nonlinear Technical Analysis is a poor
indicator for the trend vs range trading decision
Fractals quantify what Euclid
could not
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Efficient verses the Fractal Market
Hypothesis Efficient Market Hypothesis Gaussian assumption of
normally distributed prices Weak-form EMH with purely
random price distributions has been widely discounted
Semi-strong form EMH where all public information is reflected in the prices is favored by the professional community
Long-term prices exhibit no “memory”
Crash of ’87 was an “outlier”
Fractal Market Hypothesis Prices exhibit a leptokurtic
distribution Similar price patterns found at
different time increments i.e. Daily, weekly, monthly (Fractal Structure)
Decreasing reliability as forecast extends out into the future (Sensitive Dependence)
Prices exhibit short and long-term correlations and trends (Feedback Effects)
Erratic market activity under certain conditions (Critical Levels)
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Fractal Attractors
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Chaos Cruncher
Borrows from Chaos theory, Complexity theory, Fractals and Bi-Variate Statistics The program is completely statistical and quantitative All trades are fully automated Trading parameters are adaptive Predictors act as a measurable attractor (from Chaos theory) of market price No overnight positions Auto-Executed on our R.O.X.I. (Remote Order Exchange Interface) server infrastructure Only $5,000 per contract to participate Contact us at (872) 225-2110
Trading Strategy Short Term Non-Linear Algorithmic Program Description Chaos Cruncher uses bi-variate statistics, Chaos theory, fractal analysis, and Neural Net
(NN) optimization to place trades systematically intraday. By the use of our ARC (Attactor/Repulsor Coefficient) algorithm, the system changes trading styles between range markets and trend markets. In the event there is a losing trade, the Neural Net optimizes the system based on a proprietary equity curve formula. Risk management rules are used for every trade. All trades are exited by the end of the trading day. There are no overnight positions.
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Components of Chaos Cruncher
Automatic
System Health
Trade by Trade
Monitoring
Expected Outcomes
Neural Networks
Binomial Trees
“Ideal” Equity Curve Formula
Dynamic Model
Results Oriented
Success
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Portfolio Scalability
Strategy is highly scalable
Horizontal – Across products,
across prices
Vertical – Quantity of
contracts per product
Optimization mapping used
to determine optimal noise
ranges
Enables more contracts,
more trading opportunities
Mitigates market impact
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Portfolio
(4 Markets)
Market 1
(Euro)
Market 2
(Gold)
Market 3
(Crude)
Market 4
(E-Mini)
Account Size $25,000 N/A N/A N/A N/A
Markets Traded 4 1 1 1 1
Contracts Traded 4 1 1 1 1
Max Trade Length 1 Day 1 Day 1 Day 1 Day 1 Day
Commissions + Fees*/contract $40 $10 $10 $10 $10
* Commissions are based on $7.50 a round turn. Fees are based on $2.50 a round turn.
Portfolio Specifics for Chaos Cruncher (Four Market Example)
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Summary Do you wish to participate in a unique auto-execution trading
program with a progressive approach? If so, we have the answer. We offer participation in “Chaos Cruncher” through our Commodity Trading Pool (CPO). The process is simple. You invest at least $5000 dollars into the pool making you a limited partner. After that, we do all the rest. Contact our friendly staff for more details.
Our team can…
Help you become a partner
Walk you through the paperwork
Get you started for as little as $5K
Contact us for more details at
(872) 225-2110 or