Does any one know, if a CTA, who is trading mostly futures and has let's say $100 mln under management, does hold most of it in T-bills (say $80 mln), because he really needs about $5 mln to $10 mln for margin at any one time (i.e. if he wants to take positions about as large as his capital under management)? I noticed most of the CTAs have annual standard deviation (volatility) about 30-40%, which means that they take slightly leveraged positions relative to their whole capital under management. This requires very little margin, so they could keep the excess equity in T-bills. Is this additional (risk-free) return added to their performance fee basis?
I believe there was a study done on CTAs that attributed a large portion of their returns coming from the T-Bill yield. Not all CTAs obviously but your basic systematic trend-following CTA's....
No doubt about it. Which leads to a couple of corollaries: 1. I'll expect quite a few managers to suffer write downs on client funds deposited in higher yield securities which are illiquid or insolvent. 2. When Treasury yields i.e. risk free returns are high it's MUCH harder to attract risk capital to CTA's. At it's core that's the whole reasoning behind an accommodative Fed. There's an appetite for risk to get better than 2% returns but at 12% folks have little impetuous to throw the ball downfield.
1) Interest earned on customer cash should go to the customer and not the manager. The manager shouldn't be "kiting" funds. The manager can earn money from the management fee, incentive fee and possibly commission fees. Three sources is enough. 2) Since T-Bills yield nearly zero interest, another cash-equivalent can be used to actually produce some income on the idle funds.