CTAs should not be written off
Investors should not write Commodity Trading Advisors (CTAs) off despite several years of chronic underperformance, it has been said.
The Newedge CTA Index shows the average CTA has lost 0.35% in 2014 while the asset class underperformed the broader hedge fund indexes in 2013. Many of these trend following managers have struggled to generate decent performance as Central Banks continue to inject capital into the financial system which has led to diminished volatility, while near zero interest rates have not helped CTAs either.
“Investors have to be patient with CTAs. The situation today with CTAs has echoes of Black Monday back in 1987. CTAs after Black Monday traded sideways until 1994, and the moment the Federal Reserve increased interest rates, they made enormous returns, and this continued for a number of years. Sometimes, something unpredictable occurs in the market which leads to a return of trending. It is impossible to tell when or what that trigger might be, but oftentimes CTAs make money when it does. Investors should ensure they keep CTAs in their portfolios,” said one industry expert.
Academic research – Is this time different? Trend following and Financial crises – published by Professors Mark Hutchinson and John O’Brien of University College Cork in Ireland, analysed the impact financial crises had on CTAs. It evaluated how trend following portfolios fared during the 1929 crash, the 1973 oil crisis, the 1981 emerging markets debt crisis, Black Monday in 1987 and the DotCom bubble in 2000. The study found that CTAs often underperformed during these disruptive market events although rapidly returned to normality when markets stabilised.
Industry surveys reveal significant outflows from CTAs. Investors told a survey conducted by the capital introductions team at Goldman Sachs Prime Services that they intended to redeem from CTAs and managed futures as desultory returns continue. An investor survey undertaken by the prime brokerage group at Credit Suisse found CTAs and managed futures to be the least sought after strategy in 2014. Net demand for CTAs, according to Credit Suisse, dropped from 37% in 2012 to minus 10% in 2014.