Question: “What percentage of the futures industry is represented by CTA’s?”

We received this question from one of our readers the other day, and it’s a deceivingly simple little question that’s a lot more difficult to answer than you might think.

For starters, do you mean how much AUM does managed futures hold? We peg it at about $205 Billion AUM after removing Bridgewater from Barclayhedge’s numbers. That is a good measure of the assets controlled by CTAs (managed futures managers), but does little to compare to the futures industry as a whole; because managed futures considers the nominal amount of assets (an investor having $500k cash traded as $1 million would be counted as $1 million – the nominal amount), while the rest of the industry is cash based – with measures considering how much in customer assets are held by the FCM’s (futures clearing merchants).

So, while it’s an apples to oranges comparison, we can check out how much customer assets are held across the futures industry by pulling up the CFTC’s financial data for FCMs, and sum the customer required sections to come up with the total customer assets held at FCMs of about $180 Billion. Now, how many such customer assets held by FCMs are in managed futures? Well, if we break down the $205 billion in managed futures by assuming the average cash to nominal level is 3 to 1, we can assume there is $68 Billion in managed futures ‘cash’ held in these FCMs ($205B/3), giving us a managed futures share of futures industry of 37%, if the average leverage used is 2 to 1, it’s a 56% share. If 5 to 1, a 23% share.  The trick is knowing what the average notional funding level is amongst managed futures, but we think it is at least 5 to 1 these days.

Managed Futures Assets
Disclaimer: (Past performance is not necessarily indicative of future results)

What about trading volume?

If you aren’t crazy about some of the assumptions made there, what if we look at the amount of trading done versus the amount of assets held? That’s a fun little exercise too:

Again, we start by adjusting the $331.6 Billion in assets reported by BarclayHedge as of the end of the second quarter of 2013 (Sol, can’t you just remove Bridgewater so we don’t have to do that math every time we talk about managed futures AUM?), by removing Bridgewater’s $127 Billion in AUM, leaving $205 Billion in assets under management for managed futures.

We’re halfway there, and now need to turn that money under management into the total number of contracts traded annually by CTA’s. Converting AUM to contracts is found with a statistic reported by managed futures advisors called Round Turns per Million. What’s that you ask? A ‘round turn’ is a single completed trade (both a buy and a sell), as opposed to a side which is half of the full trade – either the buy or the sell. Round turns per Million measures how many ‘round turns’ are done per 1 million invested in a managed futures program. Multiply that number by 2 (there’s 2 sides per 1 round turn) and you get the number of contracts traded per million.

Per our experiences in the space, we can tell you the average CTA’s R/Ts per mm is about 1,500. So how many million dollar units are there in the $205 Billion under management? There’s 205,000 units of 1 million, meaning we can multiply that by 1,500 to arrive at 307 Million R/T’s overall per year for the managed futures industry. Convert that to contracts by multiplying by 2 and we get 616 Million contacts.

According to the Futures Industry, there are around 12 billion futures traded annually, and about 12 billion in options, combining to an end number of 24 billion”derivatives” traded globally each year.  So if you divide 616 Million contracts from managed futures by $24 Billion, we get around 2.6% of derivatives. If just on futures, we get 5.2%

If you’re like us and that sounds a little light… let’s dig deeper. From a global scale, it turns out that around 3 billion of the global volume is from Korea (which very few managed futures program access), 2 Billion from the NYSE and Indian stock exchanges, and about 1 billion each from Brazil, Russia, and India’s commodity exchange.  Remove all those totals and we’re left with about 7 Billion contracts regularly traded by managed futures managers. When considering what percent of that 7 Billion, the managed futures volume creeps up towards 9% of futures volume on the leading futures exchanges.

Managed Futures Volume
Disclaimer: (Past performance is not necessarily indicative of future results)

Do you have a question you want us to answer? Tweet us with the hashtag  #Questions4Attain with a question or email invest@attaincapital.com and we’ll look at answering your question in an upcoming post.

Comments

  1. How about looking at open interest? Using data from the CFTC Commitment of traders reports, it looks like ‘Managed Money’ is a relatively small part of total open interest. I’ve kept track of net open interest (Long minus Short) for managed money (versus commercial users and swap dealers) for about a dozen different contracts (CME and NYMEX only) for about a year now, and the average across all those contracts appears to be relatively stable at around 15%.

    I plan to use this as a kind of ‘value’ indicator – selling my managed futures investments if this number ever crosses 30% (an arbitrary threshold I admit I have plucked out of thin air). At some point, too many trendfollowers must surely start eating into each others profits. Of course I’m assuming most managed money in futures markets is trendfollowing.

    Wonder if the folks at Attain have an opinion on this?

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DISCLAIMER

Forex trading, commodity trading, managed futures, and other alternative investments are complex and carry a risk of substantial losses. As such, they are not suitable for all investors.

The entries on this blog are intended to further subscribers understanding, education, and – at times- enjoyment of the world of alternative investments through managed futures, trading systems, and managed forex, and is not intended as investment advice, or an offer or solicitation for the purchase or sale of any financial instrument. Unless distinctly noted otherwise, the data and graphs included herein are intended to be mere examples and exhibits of the topic discussed, are for educational and illustrative purposes only, and do not represent trading in actual accounts. Opinions expressed are that of the author.

*The mention of specific asset class performance (i.e. +3.2%, -4.6%) is based on the noted source index (i.e. Newedge CTA Index, S&P 500 Index, etc.), and investors should take care to understand that any index performance is for the constituents of that index only, and does not represent the entire universe of possible investments within that asset class. And further, that there can be limitations and biases to indices such as survivorship and self reporting biases, and instant history.

The mention of general asset class performance (i.e. managed futures did well, stocks were down, bonds were up) is based on Attain’s direct experience in those asset classes, estimates of performance of dozens of CTAs followed by Attain, and averaging of various indices designed to track said asset classes.

It should be noted that past market performance is not indicative of future market movement.No market data or other information is warranted by Attain Capital Management as to completeness or accuracy, express or implied, and is subject to change without notice.

Managed Futures Disclaimer:

Past Performance is Not Necessarily Indicative of Future Results. The regulations of the CFTC require that prospective clients of a managed futures program (CTA) receive a disclosure document when they are solicited to enter into an agreement whereby the CTA will direct or guide the client’s commodity interest trading and that certain risk factors be highlighted. The disclosure document contains a complete description of the principal risk factors and each fee to be charged to your account by the CTA.