CTA VAI (Value Added Index)
The CTA VAI (Valued Added Index) illustrates the benefit of Managed Futures and two core characteristics:
- Managed Futures consistently adds risk-adjusted value over the long term - not only in times of financial crisis.
- There is a timing aspect to adding or increasing exposure to Managed Futures.
Figure 1: Risk-Adjusted Value Add of including 10% in Managed Futures
- CTA VAI compares the Sharpe Ratio of a 90/10 portfolio that has a 10% allocation to Managed Futures versus an all S&P portfolio. Barclay BTOP50 Index is used for the 10% allocation.
- Index computes the value added difference in Sharpe Ratios between the two portfolios on a rolling 60 month basis.
- A positive number is reflective of the additive risk-adjusted benefit of using Managed Futures within the portfolio.
- 60 month period captures both up and down cycles in the equity market.
- The CTA VAI is mostly positive illustrating that historically there is a risk-adjusted long term benefit to including Managed Futures within a portfolio.
- Including 10% Managed Futures to the portfolio has added value in rising and falling equity markets.
- The 90/10 portfolio has improved the return with significantly less risk. (See Table 1 below.)
Table 1: Portfolio Improvement with 10% Managed Futures
- When the CTA VAI has dislocated the most from the S&P, it has been a valuable time to add CTA exposure.
- When the CTA VAI dipped under 4 and the spread was the greatest, the next 36 months the Barclay BTOP50 Index gained an average of 60% (see 4 grey zones).
- For more information on dynamically adjusting exposure, please see the White Paper
The CTA VAI is calculated taking the Sharpe Ratio of a portfolio including 90% S&P 500 and 10% Barclay BTOP50 Index (rebalanced annually) minus the Sharpe Ratio of the S&P 500 multiplied by 100. Example: Dec. 2002: -0.05 minus -0.10 = 0.05 multiplied by 100 = 5.59.