We received this question from one of our readers the other day, and it’s a deceivingly simple little question that’s a lot more difficult to answer than you might think.
For starters, do you mean how much AUM does managed futures hold? We peg it at about $205 Billion AUM after removing Bridgewater from Barclayhedge’s numbers. That is a good measure of the assets controlled by CTAs (managed futures managers), but does little to compare to the futures industry as a whole; because managed futures considers the nominal amount of assets (an investor having $500k cash traded as $1 million would be counted as $1 million – the nominal amount), while the rest of the industry is cash based – with measures considering how much in customer assets are held by the FCM’s (futures clearing merchants).
So, while it’s an apples to oranges comparison, we can check out how much customer assets are held across the futures industry by pulling up the CFTC’s financial data for FCMs, and sum the customer required sections to come up with the total customer assets held at FCMs of about $180 Billion. Now, how many such customer assets held by FCMs are in managed futures? Well, if we break down the $205 billion in managed futures by assuming the average cash to nominal level is 3 to 1, we can assume there is $68 Billion in managed futures ‘cash’ held in these FCMs ($205B/3), giving us a managed futures share of futures industry of 37%, if the average leverage used is 2 to 1, it’s a 56% share. If 5 to 1, a 23% share. The trick is knowing what the average notional funding level is amongst managed futures, but we think it is at least 5 to 1 these days.
What about trading volume?
If you aren’t crazy about some of the assumptions made there, what if we look at the amount of trading done versus the amount of assets held? That’s a fun little exercise too:
Again, we start by adjusting the $331.6 Billion in assets reported by BarclayHedge as of the end of thesecond quarter of 2013 (Sol, can’t you just remove Bridgewater so we don’t have to do that math every time we talk about managed futures AUM?), by removing Bridgewater’s $127 Billion in AUM, leaving $205 Billion in assets under management for managed futures.
We’re halfway there, and now need to turn that money under management into the total number of contracts traded annually by CTA’s. Converting AUM to contracts is found with a statistic reported by managed futures advisors called Round Turns per Million. What’s that you ask? A ‘round turn’ is a single completed trade (both a buy and a sell), as opposed to a side which is half of the full trade – either the buy or the sell. Round turns per Million measures how many ‘round turns’ are done per 1 million invested in a managed futures program. Multiply that number by 2 (there’s 2 sides per 1 round turn) and you get the number of contracts traded per million.
Per our experiences in the space, we can tell you the average CTA’s R/Ts per mm is about 1,500. So how many million dollar units are there in the $205 Billion under management? There’s 205,000 units of 1 million, meaning we can multiply that by 1,500 to arrive at 307 Million R/T’s overall per year for the managed futures industry. Convert that to contracts by multiplying by 2 and we get 616 Million contacts.
According to the Futures Industry, there are around 12 billion futures traded annually, and about 12 billion in options, combining to an end number of 24 billion”derivatives” traded globally each year. So if you divide 616 Million contracts from managed futures by $24 Billion, we get around 2.6% of derivatives. If just on futures, we get 5.2%
If you’re like us and that sounds a little light… let’s dig deeper. From a global scale, it turns out that around 3 billion of the global volume is from Korea (which very few managed futures program access), 2 Billion from the NYSE and Indian stock exchanges, and about 1 billion each from Brazil, Russia, and India’s commodity exchange. Remove all those totals and we’re left with about 7 Billion contracts regularly traded by managed futures managers. When considering what percent of that 7 Billion, the managed futures volume creeps up towards 9% of futures volume on the leading futures exchanges.