A CTA may trade in a wide variety of markets worldwide, perhaps following over 150 futures contracts in agricultural, energy, precious and industrial metals, bonds and interest rates, and currencies and stock index futures. CTAs are subject to the regulation of the Commodity Futures Trading Commission (CFTC).
h e proi ts generated by a systematic CTA are largely earned in the markets with the largest and most steady trends. A volatile, nontrending market would cause losses for systematic CTAs, who have solely implemented trend following models. Some CTAs may choose to mix trend following and counter-trend models, which bet on mean reversion rather than trends.
This diversification between trend following and counter-trend models allows the CTA to produce more consistent profits, especially in times of volatile, range-bound markets characterized by large price movements in both directions. Systematic traders are trained to understand that the largest profits come from sticking with a very long-term trend. This tendency can lead to volatile performance, with large drawdowns often following the largest gains, as long-lasting trends may reverse.
Systematic CTAs are oft en called technical traders as many fund managers simply focus on volume, volatility, and price formations. An example of a simple technical analysis rule is a moving average crossover system, where the trader takes a long position when a short-term (perhaps 5 day) moving average crosses above a long-term (perhaps 30 day) moving average.
A short position is initiated when the short moving average crosses below the long-term moving average. Ideally, all trading models are thoroughly tested before implementation, as discretionary trades are often less successful than the systematic trades, especially when that discretion leads the trader not to implement the trades requested by the system.
Many systematic CTAs trade a variety of models—each optimized for a different market condition. Perhaps a CTA may have four models including those that perform well in high- and low-volatility trending markets, and others that profit in high- and low-volatility trendless markets. Most systematic CTAs do not attempt to quantify the fundamentals of futures markets such as the supply and the demand factors facing commodities, or how interest rate or inflation expectations may impact currency or bond markets.
The funds offered by CTAs are often called managed futures funds. These funds tend to have excellent diversification characteristics when added to an equity portfolio, as the largest gains to managed futures funds often come during the time when equity markets are posting their largest losses.
Systematic CTAs typically have return profiles that have a very low, or even a negative, correlation to traditional long stock and bond market indices. Funds that trade a wide variety of markets, including commodities, are more diversifying to a portfolio of traditional investments while CTAs that solely trade financial futures are less diversifying.