What questions should you ask a volatility CTA? I like to start here…

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…


DISCLOSURE: These are the opinions of the author and may not have considered all risk factors. Nothing on this web site should be construed as an individual recommendation, talk to your independent advisor. The author and Opalesque may have relationships with those people they cover in the publication. Mr. Melin provides a full disclosure of his business relationships to regulators and certain eligible participants who engage him in consulting projects. Managed futures investing involves risk and there are no guarantees of safety or future performance being implied. Managed futures can be a risky investment. This web site and its content is subject to the terms of the web site. Risk Disclosure and terms of web site are available here: Performance information received on this site is provided by third parties and deemed reliable but there is no guarantee relative to same. Performance reporting sources and quality assurance techniques may include, but are not limited to: disclosure document, CTA self reporting, brokerage firm reporting, consultant reporting, spot checking other reporting databases; nonetheless no guarantee of accuracy or implication performance verification or auditing is being made by the publishers. The CTA Database is a project separately managed from

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