CME and AlphaMetrix - Lintner Revisited

Lintner revisited:th B  Maag F 25 Ya La

By: rya Abamim AalyAlphaMx Ala im A, LLCraja Bha, Phd CFA CAiAMaagg dc – Ha  rachAlphaMx Ala im A, LLCelzabh Fl, CAiAAca dc – i ra PcCMe Gp

cmgp.cm1

introduCtion

Dr. John Lintner, a Harvard Proessor, presented the seminal paperentitled

“The Potential Role of Managed Commodity – FinancialFutures Accounts (and/or Funds) in Portfolios of Stocks and Bonds”

at the annual conerence o the Financial Analysts Federationin Toronto in May 1983. The ndings o his work, namely thatportolios o equities and xed income exhibit substantially less variance at every possible level o expected return when combined with managed utures, remain as true as ever more than twenty-ve years later. In this brie paper, we attempt to update ProessorLintner’s work by demonstrating that the benecial correlativeproperties o managed utures presented in his research persisttoday. We also reintroduce managed utures as a diverse collectiono liquid, transparent hedge und strategies that tend to perorm well in environments that are oten dicult or traditional andother alternative investments.While many casual observers most closely associate managedutures and Commodity Trading Advisors with trend ollowing, thereality is that the strategies and approaches within managed utures vary tremendously, and that the one common uniying theme is thatthese managers trade highly liquid, exchange-traded instrumentsand deep oreign exchange markets. As a result, the terms many und managers choose to implement, including lock-ups, gates,side pockets, and penalties or early redemptions, rarely apply toinvestments in managed utures. Liquidity and transparency alsosimpliy risk management, and investing via separately managedaccounts, a common practice among managed utures investors,mitigates the risk o raud since investors retain custody o assets.Trend ollowing has demonstrated perormance persistence over themore than 30 years since the rst “turtle” strategies began trading,and many o the largest and best known CTAs employ variations o diversied trend ollowing systems. These strategies should play a role in all well-diversied institutional portolios, but they accountor only one o many varieties o managed utures strategies, the vast majority o which exhibit no statistical relationship whatsoever with trend ollowing programs. Counter-trend strategies attempt tocapitalize on the oten rapid and dramatic reversals that take placeat the end o trends. Some quantitative traders employ econometricanalysis o undamental actors to develop trading systems. Othersuse advanced quantitative techniques such as signal processing,neural networks, genetic algorithms, and other methods borrowedand applied rom the sciences.Recent advances in computing power and technology as well asthe increased availability o data have resulted in the prolierationo short-term trading strategies. These employ statistical patternrecognition, market psychology and other techniques designedto exploit persistent biases in high requency data. The countlesscombinations and permutations o portolio holdings that thesetrading managers may hold over a limited period o time also tendto result in returns that are not correlated to any other investment,including other short-term traders.

i h pap w amp pa P L’wk by mag hahbcal clapp  maag  p  h achp ay.

th cl cmba a pma h pl hlg  h maag  alm p  m al   l  ha a  cla  ay h m.

th B  Maag F 25 Ya La2

Exhibit 1:

db  Pa-W Cla Amg C h Alaeg sh-tm ta ix, Jaay 2003 – ocb 2008

Exhibit 2:

Cla Max  taal a Ala im Bchmak

A useul analogy or dierent managedutures trading programs and styles, as wellas or alternative investments in general,consists o thinking o each trading styleor program as dierent radio receivers,each o which tunes into dierent marketrequencies. Simply put, some strategies orstyles tend to perorm better or “tune in” todierent market environments. The diverseand uncorrelated investments oered by managed utures allow institutional investorsto access an entire universe o liquidtransparent hedge und strategies to add totheir portolios.The long-term correlations among equities, xed income, and managed utures remain low even 25 years ater Lintner’s study, suggestingits continuing relevance to investors interested in attaining the “ree” benets o diversication. Exhibit 2 illustrates the low andoccasionally negative correlations among managed utures and other investments.

F r e q u e n c y

Pair-Wise Correlation

Sources: AlphaMetrix Manager Database and Burghardt, Galen et al, Newedge Group

6050403020100-1.0 -0.9 -0.8 -0.7 -0.6 -0.5 -0.4 -0.3 -0.2 -0.1 0.0 0.1 0.2 0.3 0.4 0.5 0.6 0.7 0.8 0.9 1.0

b t O P 5 0 i n d e  S & P 5 0 0 i n d e  M S C i W o r l d L e  m a n b o n d C o m p o s   e U S i n d e  L e  m a n b o n d C o m p o s   e G l o  a l i n d e  G S C i t R D J A i G C o m m o d   y h F R i F u n d W e  g   e d i n d e  h F R E q u   y h e d g e i n d e  L P x b u y o u  i n d e  S & P / C    g r o u p W o r l d R E i t t R i n d e  A l  e r n a   v e E d g e S t t i

BtoP 50 ix1.00s&P 500 ix(0.03)1.00MsCi Wl(0.07)0.85 1.00Lhma B Cmp u.s. ix0.23(0.18)(0.20)1.00Lhma B Cmp Glbal ix0.22 0.19 0.19 0.88 1.00GsCi tr0.15 0.02 0.02 0.01 0.01 1.00dJ AiG Cmmy0.21 0.08 0.21 0.03 0.10 0.88 1.00HFri F Wgh ix(0.03)0.71 0.72(0.11)0.04 0.15 0.29 1.00 HFr eqy Hg ix(0.02)0.67 0.67(0.10)0.04 0.20 0.27 0.94 1.00 LPX By ix(0.25)0.61 0.62(0.21)(0.32)0.01 0.07 0.62 0.59 1.00 s&P/Cgp Wl reit tr ix0.03 0.45 0.46 0.10 0.20(0.05)0.11 0.41 0.35 0.46 1.00Alaeg stti0.32(0.09)(0.01)0.21 0.33 0.31 0.28 0.03 0.04(0.32)(0.05)1.00

sc: AlphaMx Ala im A, Blmbg, LPX GmbH. All ac calcla  maxmz mb  ba, a ch mb  ba   calcla a(BtoP 50 - Ja 1987, s&P 500 - Ja 1980, MsCi Wl - Ja 1988, Lhma B Cmp us ix - sp 1997, Lhma B Cmp Glbal ix - Fb 1980, GsCi tr - Ja 1980, dJ AiG Cmmyix - Fb 1991, HFr F Wgh ix - 1990, HFr eqy Hg ix - Ja 1990, LPX By ix - Ja 1998, s&P/Cgp Wl reit tr ix - Ja 1990). All ac calcla hgh sp2008 wh h xcp  h Lhma B c, whch a calcla hgh Ag 2008. th Alaeg stti bg  Jaay 2003 a am qal wghg  23 h-m a, hc,  a  a wh a aag hlg p  l ha 10 ay. th c’  a acal, b h x  a pma. i ac wh h ack c  apgam  pgam ha  y cmmc,  wghg    a p-aa ba amg all h c.