Excess Returns

NilssonHedge has decided to publish a dataset that shows returns above the risk-free rate of return (our indices and other data are quoted on a total return basis). We have made this decision as most of the managers in the database are derivatives strategies or strategies that are market neutral. Invariable, these managers will have cash sitting in their accounts and earning T-bill returns or equivalent. Moreover, the benchmark for an absolute return strategy is typically cash returns.

Cash returns have historically had a time-varying effect. Since the Financial Crisis in 2008/09, cash returns have been low. In prior environments, the cash returns have been a significant source of income for managed futures managers. For some Managed Futures / Hedge Fund indices, the cash returns represent about half of the total returns. The returns from risk-free income do not represent skill-based returns and are thus removed from this particular dataset.

This puts emphasis on the trading returns a manager has generated. NilssonHedge’s returns will always be lower than returns from other sources. Returns are consistent within the database but may not be consistent with the returns seen elsewhere.

Commonly, CTAs only commit 10-20% to margin deposits and thus have around 80% free cash that is typically put on deposit or managed through Treasury Bills. This is one of the features that makes Managed Futures amicable to notional exposure, only a fraction of the committed cash is used for margin at the exchange. Only the trading profits can be levered up and not the risk-free income. The impact for lower volatility managers tend to be larger.