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Hi Gary;
Its easy, say you invest 100K with a CTA, at the end of the year after all fees your account is worth $150K, your account increased 50%. The reason this is so good is the amount of money that he actually used to create that $50K increase. Most good CTA's will use on average about 20% of available equity for margin money (margin/equity ratio), the balance goes into T-Bills.
So, if you invested $100K, our hypothetical CTA would use $20K to trade with, place the other $80K in T-Bills, and proceed to create a net profit of $50K. This is a actual return of 250%. The trick question is ascertaining the margin/equity ratio. Most CTA's in their disclosure documentation specify that they will not exceed a 50% ratio. Assuming the worst ratio possible this still translates to a 100% return.
The secret to successful trading is managing your risk exposure, everything else is secondary.
Best regards,
At 04:28 PM 12/7/1999 -0700, you wrote: >>>> John, thanks for the very enlightening posts.
I have a really basic question: how is a CTA's return calculated? I see all these CTA's reporting 10%, 50%, maybe even 100% in a year, and that doesn't seem all that astounding to me. Certainly my system is returning a lot more than that, and has for over a year. (Too bad I haven't been able to trade it with real funds until recently. :-( ) But I wonder if maybe they're reporting it differently than I am.
Does a CTA's return assume zero leverage? I.e. is a $100k return on an account trading the S&P considered 100k/(1400*250) = 28.6%? What if the system has low drawdowns, allowing high leverage, and the account started the year with $50k? Is that still an (unleveraged) 28.6%, or is it 200%?
I'm just puzzled why people get excited about a 50% return, when I would have done *way* more than that if I had been able to trade my system for the past year. I'm certainly no market wizard. Am I comparing apples to oranges?
Gary
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.oİş°¨¨°şİ[ John Hayden ]İş°¨¨°şİo. ¨¨°şİo.,.oİş°¨¨°şİ[ Have a bodaciously outrageous day! ]İş°¨¨°şİo.,.oİş°¨¨
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