Macro and Managed Futures Funds

Question 1

1. Distinguish discretionary fund trading from systematic fund trading.

Answer 1

• Discretionary fund trading is where the decisions of the investment process are made directly by the judgment of human traders.
• Systematic fund trading, often referred to as black-box model trading because the details are hidden in complex software, is where the ongoing trading decisions of the investment process are automatically generated by computer programs.

Question 2

2. Describe the strategy of a global macro fund.

Answer 2

• Global macro funds have the broadest investment universe: They are not limited by market segment, industry sector, geographic region, financial market, or currency and therefore tend to offer high diversification. They search diverse markets for perceived opportunities to achieve attractive returns.

Question 3

3. What does market risk mean in the context of macro investing?

Answer 3

• Market risk refers to exposure to directional moves in general market price levels. The definition is this context is not restricted to equity market risk.

Question 4

4. Describe the strategy of a managed futures.

Answer 4

• Managed futures refers to the active trading of futures and forward contracts on physical commodities, financial assets, and exchange rates. The purpose of the managed futures industry is to enable investors to receive the risk and return of active management within the futures market, while enhancing returns and diversification.

Question 5

5. What is a commodity trading advisor (CTA)?

Answer 5

• Commodity trading advisers (CTAs) are professional money managers who specialize in the futures markets.

Question 6

6. List three questions in evaluating a systematic trading system.

Answer 6

• What is the trading system, and how was it developed?
• Why and when does the trading system work, and why and when might it not work?
• How is the trading system implemented?

Question 7

7. In a market trending upward, explain how the value of a simple moving average compares to the value of an exponential moving average?

Answer 7

• Exponential moving averages place higher weights on more recent observations for typical values of the exponential weighting parameter. If prices are trending upward the exponential moving average will tend to recognize an upward trend more quickly and more profoundly due to the higher weight on the more recent (and higher) prices.

Question 8

8. Does whipsawing tend to occur in a trending market or a sideways market?

Answer 8

• Sideways markets where upward and downward movements tend to alternate.

Question 9

9. What is a breakout strategy?

Answer 9

•Breakout strategies focus on identifying the changes from a sideways market to the commencement of a new trend by observing the range of recent market prices (e.g., looking back at the range of prices over a specific time period).

Question 10

10. List the six major potential risks of managed futures funds.

Answer 10

• Transparency risk
• Capacity risk
• Liquidity risk
• Model risk
• Regulatory risk
• Lack of trends risk