When speaking with CTAs its productive to have at the ready a number of interesting questions to get an interview process rolling. Here are some conversation starters that break the ice:
Can volatility be predicted? Past study of volatility has indicated that occurrences are randomized. If it can be predicted, what are you looking at? Do the variables in your formula have validity?
Describe your strategy in less than three minutes. (I ask this for a very specific reason.) Are you 100% discretionary or is there some formula or process you utilize?
What is your edge?
What happens when the VIX is at very low levels? Are their points at which you don’t enter the market? Sit on the sidelines?
Are you a market diversified CTA or do you work only on the S&P? Are you selling calls and puts or just puts? How do you determine distance from the money to collect premium? Is their a volatility based formula or is it a standard deviation from the market?
Describe how you enter a positions?
Address your risk controls. When unexpected volatility strikes, how does the risk management work? Are you hedging with futures or option spreads? Do you sell into the back month and roll the position? What can I expect when volatility strikes?
What’s your margin to equity levels during a normalized market environment and what is the worst case extreme during a volatile market environment?
Your risk management has not been tested during a 2008 type crash. Did you model it? What can be expected during such a time period?
These are the questions. The key is in understand what the CTA answers mean, and what it means when the don’t answer certain questions…
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