MANAGED FUTURES

Managed Futures



Managed Futures

Introduction

The key element of construction for the Dow Jones Portfolio Indexes is the use of three Composite Major Asset Classes (CMACs) that represent stocks, bonds and cash. The cash CMAC consists of one index that tracks U.S. Treasury bills.

The other two CMACs are subdivided into sub-asset-class indexes representing the generally recognized types of investments within the CMAC, such as U.S. Large Capitalization Growth Stocks or Mortgage-Backed Bonds. (See Illustration 3.) While the indexes representing these sub-asset classes are capitalization-weighted, the sub-asset classes are equally weighted within each CMAC, with rebalancing occurring at the beginning of each month. The resulting structure is neutral in terms of asset allocation. Any portfolio that gives more weight to one sub-asset class over another necessarily requires underweighting at least one other, which constitutes a subjective asset allocation decision.

Deviating from the traditional capitalization-weighted structure of indexes was not undertaken casually.

Capitalization weighting is hinged upon the idea that the market has determined relative values that are at least notionally associated with the comparative availability of and demand for the securities representing that asset.

However, the equity sub-asset classes are notional groupings - small-cap value, for example - whose definitions vary from investor to investor. Therefore, the relative value of any one of these sub-asset classes at any given time cannot be directly equated to capitalization weighting, which is by definition the market's perception of the relative value of individual securities with finite shares outstanding. With no consensus definition of these subasset classes, there could be no number of shares outstanding for the market to consider when arriving at the market value of the securities relative to the sub-asset class. Thus, market capitalization cannot be viewed for sub-asset classes in the same sense as for individual securities when considering relative market value.

Capitalization weighting also cannot be applied directly in building a portfolio of stocks, bonds and cash. When linking three assets that are structurally different and traded in different markets for different reasons the comparative total value of the three markets are not necessarily associated in a micro-economic sense - especially since the values of fixed income instruments and stocks are not established in the same way.

Dividing the risk spectrum

The risk space addressed in the Dow Jones Portfolio Indexes lies between the risk of a diversified stock portfolio and T-bills (cash). This construct requires the assumption that the risk of the stock market will always be the greatest of the three asset classes for the trailing three-year period used to set the risk.

Rather than use static allocations of these three asset classes and examine the risks of those allocations, the risk spectrum was defined as percentages of the risk of the stock market.

Thus, the Dow Jones Relative Risk Indexes quantify the static risk levels listed above in this manner:

a. conservative - 20% of risk of an all-stock portfolio

b. moderately conservative - 40% of the all-stock risk

c. moderate - 60% of the all-stock risk

d. moderately aggressive - 80% of the all-stock ...