If you are a CTA, what option you use to calculate ROR? According to page 9 of âDisclosure Documents A Guide for CPOs and CTAsâ http://www.nfa.futures.org/COMPLIANCE/publications/dd2001/DD2005.pdf There are 4 options to use. Which option you use? And why? 1. ROR is defined as net performance for a period divided by the BNAV for that period. Using this method, however, can sometimes result in distortions in computed ROR under certain circumstances. For example, distortions can result when additions and/or withdrawals are large and are made early in the reporting period. In those instances when using the above method would result in RORs that are inaccurate the following alternate methods are acceptable provided that the resultant RORs are not misleading. 2. Time-weighting. In the time-weighting method, the BNAV is adjusted upward by time-weighted additions and downward by time-weighted withdrawals. For additions, the time-weighting represents the percentage of the month for which funds were available, while for withdrawals the time-weighting represents the percentage of the month for which funds were unavailable. 3. Compounded ROR. In this method, the ROR is calculated for each sub period between additions/withdrawals (as if each such sub period were itself an entire month). As the name implies, the compounded ROR for the entire month would be equal to the compounded return for the sub period. 4. Only Accounts Traded. The only accounts traded (OAT) method calculates the monthly ROR in the conventional manner of dividing the net performance by the BNAV, except that accounts that traded for only part of the month or witnessed âmaterialâ additions/withdrawals during the months would be excluded from the calculations. By excluding these accounts, the calculated figure will reflect the ROR that would have been realized by an investor with an account that was active at the start of the month and held until the end of the month without any additions or withdrawals. In effect, by removing the influence of intra month additions/withdrawals, the OAT method yields an undistorted actual return figure. Each of the above methods of computing ROR is acceptable provided certain conditions are met and the resultant RORs are not misleading. QUESTION: 1. Is option 1 a validate option? 2. Does any one use option 1? 3. Which option is simplest to calculate?
Neither method is easy to calculate, although in my view Compounded ROR is more accurate than the others. Some CTAs use the ROR method, but they accept new money under management only at the end of the quarter. Same thing for withdrawals. Also they don't take into consideration reinvestment of profits. It also helps to only accept money in increments of the minimum account size only.
Why sacrifice growth for accounting ease? Only if they are near the maximum liquidity their strategy can handle (and many profitable CTAs are), it's OK not to accept more money.
In practice, this is a question that the CTA asks when hiring her accountant. Typically the accountant will offer some but not all of the ROR options, and will gladly tell you the reasons why. Sometimes the accounting fees are different for the different ROR options. The CTA chooses the accountant, based on the ROR options offered, the fees, and myriad other factors. The CTA tells the accountant which ROR option to use, and that's the end of the story. It's a slightly different ballgame for CPOs than for CTAs. CPOs typically don't accept notional funding, and typically don't allow additions or withdrawals except at fixed intervals (with plenty of advance warning). Last-day-of-the-month or last-day-of-the-quarter are the most commonly chosen liquidity moments. Usually the Pool Operator puts a bit of her own money into a "standard investor account" in the pool, which starts on day 1 with a small fixed investment (such as $10,000.00), which pays full fees, and which never makes additions or takes withdrawals. The pool's accountant typically reports this account's ROR as the "Rate of Return to a Standard Investor". Rather like an OAT decision for a CTA.
07-10-08 01:16 PM Quote from Sunshine4ever: Neither method is easy to calculate, although in my view Compounded ROR is more accurate than the others. Not only is it "more accurate", it's perfectly accurate... easy to do, to. Mutual funds use it. What happen if you have a lot of small accounts in different FCMs and virtually you have deposit/withdrawal every business day? With Compounded ROR, does that mean you have to access all daily statements from all FCMs for all accounts? How easy and practical to do this task?
Why would you make your business so complicated? Can't you arrange such details to make it easier on yourself?
Why would you make your business so complicated? Can't you arrange such details to make it easier on yourself? Agreed and trying. That is the reason I try to figure out which option may be the easier to implement to calculate ROR. Any suggestion?
For the following two options: Option 2: Time-weighting --- My understanding is that for this option, you just need to have all monthly statements for all accounts. Each monthly statement will have time stamp on when (which date) the deposits or withdraws were made. Based on that, you can adjust them based on time-weight. For this option, monthly account statements are enough for the purpose of calculate ROR, no need to have daily account statements. Option 3: Compounded ROR --- My understanding is that for this option, you need to know the equity balance for each and every day you have new deposits or new withdraw for all account. In other words, just to have monthly account statements is NOT sufficient for the purpose of ROR calculation. You need daily account statements for all accounts. Do I understand the above correctly? If you have many small managed accounts (say 100 small accounts and each only has about $10,000), between, âOption 2: Time-weightingâ and âOption 3: Compounded RORâ, which option you prefer, assuming you have to do ROR calculation manually on your own? Please advise. Thanks.