The Efficient Frontier
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The Efficient Frontier FEBRUARY 11, 2014 BY ATTAIN CAPITAL
LEAVE A COMMENT (EDIT)
For those needing a refresher on what exactly the Efficient Frontier is… see below in Part 1. For those in the know who just want to see what the curve looks like now… skip to Part 2. 1. What is It? The Efficient Frontier sounds like something out of Star Trek, but it is actually an investment/asset allocation concept put forth by those who believe in Modern Portfolio Theory. The general idea is that components of a portfolio should be selected based on what they do to the portfolio’s overall risk and reward profile, not on their own merits. Taken further, one can calculate the best possible mix of portfolio components to arrive at the highest possible return with the lowest possible risk (in terms of volatility or standard deviation of returns). That intersection of the best possible return with the lowest risk is the ‘Efficient Frontier’ point, while the entire graph of various return and risk levels at varying asset allocation amounts can also be called the Efficient Frontier, or Efficient Frontier graph. Here’s the Efficient Frontier as the CME used to include in its educational materials detailing managed futures, as of 02/2008:
RECENT POSTS The Efficient Frontier Commodity ETFs vs Long Futures vs Ag Trading CTAs Weekend Reads Managed Futures Industry Ditches Polar Vortex for MFA Chart of the Week: Coffee Cuing Up an Up Trend?
SEARCH Search this website… S EARCH
Source: CME This showed us that adding a 20% allocation to managed futures increased returns, while decreasing risk (as measured by the volatility of returns). Wow…more returns with less risk, where do I sign up? The same exercise can be done on any mixture of assets – plotting the compound annual rate of return on the y axis (the vertical one) and the annualized volatility of the investment on the x axis (the horizontal one). That may bring back nightmares of calculus curves to some, but the game is simple: get as high as you can, and as far left as you can – on the graph.
2. How’s it look lately? Ok, so we get the concept – now just what has the efficient frontier been telling us about asset allocation lately? We mapped out the curve on an updated set of data including the past 3 years, and the results were a little surprising. You’ll see the typical portfolio (50/50 in the CME’s old chart, 60/40 stocks/bonds in our table below) completely switched sides of the graph – going from the lowest return/medium risk portfolio to the highest return/medium risk portfolio combination; while having 100% of the portfolio in managed futures went from being the highest return/highest risk to the lowest return/highest risk (not the profile you want exactly).
Attain Capital Management Specialized asset management firm working in managed futures, managed fo… Following
+1
+ 141
Follow
289
TWITTER Tweets
Follow
Attain Capital @AttainCapital
(Disclaimer: Past performance is not necessarily indicative of future results) Data Stocks = S&P 500, Bonds = S&P/Citigroup International Treasury Bond Index EX-U.S Index, Managed Futures = Dow Jones Credit Suisse Managed Futures Index This is a direct result of the poor five year period managed futures have just gone through (with most CTA indices down slightly over that period and the compound return of managed futures over the period fell from about 6.5% to about 5%) paired with the great period stocks have had the past two years (lifting its compound annual return from 7.3% to 8.5%); and just goes to show that any such work in seeing what the optimum portfolio mix was is just that – a look backwards. But here is another twist to the story… despite managed futures having shed some numbers in the return department, a 40% allocation to managed futures still results in the optimum portfolio mix (with 36% stocks and 24% bonds). We might have expected managed futures to lose its spot as the efficient frontier poster child after this tough 5 year period, but there is remains – firmly in place on the upper left hand of the curve.
9m
The Efficient Frontier: Star Trek 13's new title, or a portfolio modeling tool? bit.ly/1eo8xjL
Attain Capital @AttainCapital
20m
55% invested in alts for Harvard RT @barronsonline: How does your portfolio compare to Harvard's? How should it? on.barrons.com/1gUIKr3 Show Summary Attain Capital @AttainCapital
1h
Quick, without looking: Which capitalized more off of the Natural Gas surge: Futures of ETF? bit.ly/1eKTlmR $NG_F $UNG
How does it stay relevant in the risk/return conversation after its return side has struggled recently. It’s when the volatility happens, not just if it happens. And in managed futures case, the non correlation means the volatility of the managed futures part of the portfolio happens at different times than that in
Attain Capital @AttainCapital
2h
the stock and bond portfolio (except last month, see here).
ETF vs the Futures they track. Which one's better? bit.ly/1eKTlmR
Finally – we should note that the efficient frontier as it is usually trotted out – as return over volatility of
Expand
returns – suffers from the same problems the Sharpe ratio does, in that it treats risk as the volatility of returns only. There is a lot more to risk than just the volatility of returns (downside volatility and drawdown to name two…), which led us to ‘rethink the efficient frontier’ in an old 2010 whitepaper. If we get around to it… we’ll update those various efficient frontiers here sometime soon.
Attain Capital @AttainCapital Who has the advantage in the Active vs
Tweet to @AttainCapital
6h
Each year, Attain Capital delivers its Semi-Annual CTA Rankings, evaluating programs across eleven different metrics related to return, risk, correlation levels, ease of access (minimum account size) and length of track record over a variety of timeframes.
Click here to see who topped the latest
You may also like:
THE WEEKEND ‘PROBLEM’ READS WITH LIQUID ALTERNATIVES – IN ONE NICE The ‘Problem’ with Liquid Alternatives – in one nice Table
Weekend Reads
WEEKEND READS
edition.
TOP POSTS Attain Capital's Semi-Annual CTA Rankings Commodity ETFs vs Long Futures vs Ag Trading CTAs
Weekend Reads
Managed Futures down -1% in Jan. (Where’s
NEWSLETTER:Chart of the Week: Coffee Cuing Up an Up WHERE’S THE Trend? BEEF Managed Futures Industry Ditches Polar Vortex for MFA (RETURN)? the Crisis Performance?)
Checking in on the Gundlach Spreads
The trend that got away?
Newsletter: Where’s the Beef (Return)?
HOT TOPICS $CL_F $NG_F $ZC_F alternative investments asset class scoreboard Assets under management
0 Tw eet FILED UNDER: OFF TOPIC
TAGGED WITH: ALLOCATION, BONDS, CTA, EFFICIENT FRONTIER, MANAGED
FUTURES, PORTFOLIO CONSTRUCTION, RISK, TOTAL RETURN
bonds
CFTC Clarke Capital CME CME Group commodities CORN Corn Futures correlation Crude Oil crude oil futures CTA
diversification fraud
CTAs
futures trading gold
Gold Futures Hedge Funds long-only
Managed Futures commodity etfs
Speak Your Mind Logged in as Attain Capital. Log out?
managed futures performance MF
Global mutual funds
newedge cta index
newsletter NFA performance pfg
pfgbest
real estate risk management risk on/risk off
S&P 500 segregated accounts segregated funds
stocks trend following volatility
DISCLAIMER Forex trading, commodity trading, managed futures, and other alternative investments are complex and carry a risk of substantial losses. P O S T CO M M EN T
As such, they are not suitable for all investors.
Notify me of follow-up comments by email.
The entries on this blog are intended to further
Notify me of new posts by email.
subscribers understanding, education, and –
DISCLAIMER Forex trading, commodity trading, managed futures, and other alternative investments are complex and
at times- enjoyment of the world of alternative investments through managed futures, trading systems, and managed forex. Unless
carry a risk of substantial losses. As such, they are not suitable for all investors.
distinctly noted otherwise, the data and graphs
The entries on this blog are intended to further subscribers understanding, education, and – at times-
included herein are intended to be mere
enjoyment of the world of alternative investments through managed futures, trading systems, and
examples and exhibits of the topic discussed,
managed forex, and is not intended as investment advice, or an offer or solicitation for the purchase or
are for educational and illustrative purposes
sale of any financial instrument. Opinions expressed are that of the author.
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. The mention of market based performance (i.e. Corn was up 5% today) reflects all available information as of the time and date of the publication. 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.
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DISCLAIMER Forex trading, commodity trading, managed
Copyright © 2013 Attain Capital Management,
800.311.1145
licensed Managed Futures , Trading System &
312.604.0926
Commodity Brokers . All Rights Reserved.
Legal & Disclaimers
futures, and other alternative investments are
Privacy Policy
complex and carry a risk of substantial losses. As
Google
such, they are not suitable for all investors. The
+
mention of market based performance (i.e. Corn was up 5% today) reflects all available information as of the time and date of the publication.
RETURN TO TOP OF PAGE
COPYRIGHT © 2014 · ENTERPRISE THEME ON GENESIS FRAMEWORK · WORDPRESS · LOG OUT
ABOUT
WHY MANAGED FUTURES?
TRADING SYSTEMS
MANAGED FOREX
RESOURCES
MARKETS
CONTACT
MACRO COMMENTARY
OFF TOPIC
POSTS
COMMENTS
NEWSLETTERS
The Efficient Frontier FEBRUARY 11, 2014 BY ATTAIN CAPITAL
LEAVE A COMMENT (EDIT)
For those needing a refresher on what exactly the Efficient Frontier is… see below in Part 1. For those in the know who just want to see what the curve looks like now… skip to Part 2. 1. What is It? The Efficient Frontier sounds like something out of Star Trek, but it is actually an investment/asset allocation concept put forth by those who believe in Modern Portfolio Theory. The general idea is that components of a portfolio should be selected based on what they do to the portfolio’s overall risk and reward profile, not on their own merits. Taken further, one can calculate the best possible mix of portfolio components to arrive at the highest possible return with the lowest possible risk (in terms of volatility or standard deviation of returns). That intersection of the best possible return with the lowest risk is the ‘Efficient Frontier’ point, while the entire graph of various return and risk levels at varying asset allocation amounts can also be called the Efficient Frontier, or Efficient Frontier graph. Here’s the Efficient Frontier as the CME used to include in its educational materials detailing managed futures, as of 02/2008:
RECENT POSTS The Efficient Frontier Commodity ETFs vs Long Futures vs Ag Trading CTAs Weekend Reads Managed Futures Industry Ditches Polar Vortex for MFA Chart of the Week: Coffee Cuing Up an Up Trend?
SEARCH Search this website… S EARCH
Source: CME This showed us that adding a 20% allocation to managed futures increased returns, while decreasing risk (as measured by the volatility of returns). Wow…more returns with less risk, where do I sign up? The same exercise can be done on any mixture of assets – plotting the compound annual rate of return on the y axis (the vertical one) and the annualized volatility of the investment on the x axis (the horizontal one). That may bring back nightmares of calculus curves to some, but the game is simple: get as high as you can, and as far left as you can – on the graph.
2. How’s it look lately? Ok, so we get the concept – now just what has the efficient frontier been telling us about asset allocation lately? We mapped out the curve on an updated set of data including the past 3 years, and the results were a little surprising. You’ll see the typical portfolio (50/50 in the CME’s old chart, 60/40 stocks/bonds in our table below) completely switched sides of the graph – going from the lowest return/medium risk portfolio to the highest return/medium risk portfolio combination; while having 100% of the portfolio in managed futures went from being the highest return/highest risk to the lowest return/highest risk (not the profile you want exactly).
Attain Capital Management Specialized asset management firm working in managed futures, managed fo… Following
+1
+ 141
Follow
289
TWITTER Tweets
Follow
Attain Capital @AttainCapital
(Disclaimer: Past performance is not necessarily indicative of future results) Data Stocks = S&P 500, Bonds = S&P/Citigroup International Treasury Bond Index EX-U.S Index, Managed Futures = Dow Jones Credit Suisse Managed Futures Index This is a direct result of the poor five year period managed futures have just gone through (with most CTA indices down slightly over that period and the compound return of managed futures over the period fell from about 6.5% to about 5%) paired with the great period stocks have had the past two years (lifting its compound annual return from 7.3% to 8.5%); and just goes to show that any such work in seeing what the optimum portfolio mix was is just that – a look backwards. But here is another twist to the story… despite managed futures having shed some numbers in the return department, a 40% allocation to managed futures still results in the optimum portfolio mix (with 36% stocks and 24% bonds). We might have expected managed futures to lose its spot as the efficient frontier poster child after this tough 5 year period, but there is remains – firmly in place on the upper left hand of the curve.
9m
The Efficient Frontier: Star Trek 13's new title, or a portfolio modeling tool? bit.ly/1eo8xjL
Attain Capital @AttainCapital
20m
55% invested in alts for Harvard RT @barronsonline: How does your portfolio compare to Harvard's? How should it? on.barrons.com/1gUIKr3 Show Summary Attain Capital @AttainCapital
1h
Quick, without looking: Which capitalized more off of the Natural Gas surge: Futures of ETF? bit.ly/1eKTlmR $NG_F $UNG
How does it stay relevant in the risk/return conversation after its return side has struggled recently. It’s when the volatility happens, not just if it happens. And in managed futures case, the non correlation means the volatility of the managed futures part of the portfolio happens at different times than that in
Attain Capital @AttainCapital
2h
the stock and bond portfolio (except last month, see here).
ETF vs the Futures they track. Which one's better? bit.ly/1eKTlmR
Finally – we should note that the efficient frontier as it is usually trotted out – as return over volatility of
Expand
returns – suffers from the same problems the Sharpe ratio does, in that it treats risk as the volatility of returns only. There is a lot more to risk than just the volatility of returns (downside volatility and drawdown to name two…), which led us to ‘rethink the efficient frontier’ in an old 2010 whitepaper. If we get around to it… we’ll update those various efficient frontiers here sometime soon.
Attain Capital @AttainCapital Who has the advantage in the Active vs
Tweet to @AttainCapital
6h
Each year, Attain Capital delivers its Semi-Annual CTA Rankings, evaluating programs across eleven different metrics related to return, risk, correlation levels, ease of access (minimum account size) and length of track record over a variety of timeframes.
Click here to see who topped the latest
You may also like:
THE WEEKEND ‘PROBLEM’ READS WITH LIQUID ALTERNATIVES – IN ONE NICE The ‘Problem’ with Liquid Alternatives – in one nice Table
Weekend Reads
WEEKEND READS
edition.
TOP POSTS Attain Capital's Semi-Annual CTA Rankings Commodity ETFs vs Long Futures vs Ag Trading CTAs
Weekend Reads
Managed Futures down -1% in Jan. (Where’s
NEWSLETTER:Chart of the Week: Coffee Cuing Up an Up WHERE’S THE Trend? BEEF Managed Futures Industry Ditches Polar Vortex for MFA (RETURN)? the Crisis Performance?)
Checking in on the Gundlach Spreads
The trend that got away?
Newsletter: Where’s the Beef (Return)?
HOT TOPICS $CL_F $NG_F $ZC_F alternative investments asset class scoreboard Assets under management
0 Tw eet FILED UNDER: OFF TOPIC
TAGGED WITH: ALLOCATION, BONDS, CTA, EFFICIENT FRONTIER, MANAGED
FUTURES, PORTFOLIO CONSTRUCTION, RISK, TOTAL RETURN
bonds
CFTC Clarke Capital CME CME Group commodities CORN Corn Futures correlation Crude Oil crude oil futures CTA
diversification fraud
CTAs
futures trading gold
Gold Futures Hedge Funds long-only
Managed Futures commodity etfs
Speak Your Mind Logged in as Attain Capital. Log out?
managed futures performance MF
Global mutual funds
newedge cta index
newsletter NFA performance pfg
pfgbest
real estate risk management risk on/risk off
S&P 500 segregated accounts segregated funds
stocks trend following volatility
DISCLAIMER Forex trading, commodity trading, managed futures, and other alternative investments are complex and carry a risk of substantial losses. P O S T CO M M EN T
As such, they are not suitable for all investors.
Notify me of follow-up comments by email.
The entries on this blog are intended to further
Notify me of new posts by email.
subscribers understanding, education, and –
DISCLAIMER Forex trading, commodity trading, managed futures, and other alternative investments are complex and
at times- enjoyment of the world of alternative investments through managed futures, trading systems, and managed forex. Unless
carry a risk of substantial losses. As such, they are not suitable for all investors.
distinctly noted otherwise, the data and graphs
The entries on this blog are intended to further subscribers understanding, education, and – at times-
included herein are intended to be mere
enjoyment of the world of alternative investments through managed futures, trading systems, and
examples and exhibits of the topic discussed,
managed forex, and is not intended as investment advice, or an offer or solicitation for the purchase or
are for educational and illustrative purposes
sale of any financial instrument. Opinions expressed are that of the author.
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. The mention of market based performance (i.e. Corn was up 5% today) reflects all available information as of the time and date of the publication. 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.
ARCHIVES February 2014 January 2014 December 2013 November 2013 October 2013 September 2013 August 2013 July 2013 June 2013 May 2013
April 2013 March 2013 February 2013 January 2013 December 2012 November 2012 October 2012 September 2012 August 2012 July 2012 June 2012 May 2012 April 2012 March 2012 February 2012 January 2012 December 2011 November 2011 October 2011 September 2011 August 2011 July 2011 June 2011 May 2011 April 2011 March 2011 February 2011 January 2011 December 2010 November 2010 October 2010 September 2010 August 2010
DISCLAIMER Forex trading, commodity trading, managed
Copyright © 2013 Attain Capital Management,
800.311.1145
licensed Managed Futures , Trading System &
312.604.0926
Commodity Brokers . All Rights Reserved.
Legal & Disclaimers
futures, and other alternative investments are
Privacy Policy
complex and carry a risk of substantial losses. As
such, they are not suitable for all investors. The
+
mention of market based performance (i.e. Corn was up 5% today) reflects all available information as of the time and date of the publication.
RETURN TO TOP OF PAGE
COPYRIGHT © 2014 · ENTERPRISE THEME ON GENESIS FRAMEWORK · WORDPRESS · LOG OUT
