Interest jumps in CTA and macro managers, according to Citi Prime Finance survey
Investor interest in liquid commodity trading advisors (CTAs) and currency-focused macro hedge funds has accelerated since 2008, according to a survey by Citi Prime Finance.
The survey, released at the Managed Funds Association’s annual conference in Chicago, revealed managed futures’ assets under management (AuM) grew 52% between 2007 and 2011, while hedge funds’ AuM increased by just 5%. Managed futures now account for 14% of total hedge fund AuM.
“The pace of growth in the CTA and macro space remains strong and I believe it will continue to grow. Rough estimates show that the average institution tends to make substantial shifts in their portfolio every three to five years. I believe we are in year three of this cycle, so I believe more capital will flow into those strategies over the next few years as other institutions follow market leaders into the CTA and macro space,” said Sandy Kaul, US head of business advisory at Citi Prime Finance in New York.
CTA and macro strategies appeal to investors as they tend to be uncorrelated to other asset classes and have delivered consistent returns during bouts of volatility.
“Investors believe CTA and macro tend not to correlate that much with underlying securities. Institutional investors, particularly the large pension plans, are not looking for spectacular returns but portfolio diversification and portfolio resilience in these difficult markets,” she added.
Managed futures were once viewed as “high octane” although their expanding institutional investor base, from what was traditionally a retail dominated space, has prompted managers to curb their volatility in favour of targeting more modest returns.
Kaul reckoned investors would stick with CTAs and macro managers over the long-term as they had become more realistic about their return expectations, as well as the likelihood of re-entering an equity bull market anytime soon. “A lot of investors are looking at 100 year to 120 year charts and many are fast suspecting that the 30 year bull market in equities which we had up until 2007/2008 was an abnormal market period. Some believe the slow growth economic environment we are going to enter into is the new normal,” said Kaul
Nevertheless, there is a potential risk some allocators view CTAs as fail-proof investments. “It is important to remember CTAs are not immune from extreme market events such as flash crashes, for example. When such events occur, CTAs can be thrown off course. Alternatively, some sets of market conditions can cause CTA models to align and this can negatively impact returns. However, CTAs are hiring very smart recruits, and many mathematicians and PhDs who traditionally would have gone to quant shops are now joining CTAs and this should help ensure stability to the best extent possible,” said Kaul.
There has also been a shift among liquid CTAs and macro managers from discretionary trading towards systematic. Whereas AuM was fairly evenly split between these two trading approaches in 2000 (55% systematic and 45% discretionary), the ratio has changed substantially with 83% of assets now invested in systematic in 2011, according to data from BarclayHedge.
The Citi paper highlighted technology had heralded the decline of discretionary trading. The evolution of electronic exchange trading pits has seen a ready drop in floor traders, historically a big talent pool of would-be discretionary traders.
Furthermore, improved technology has led to a more widespread availability of modelling tools and greater access to exchange price data, thereby enabling a broader set of market participants to develop their own systems. Finally, the explosion in the sheer volume of futures contracts available has provided huge opportunities for systematic traders to test their models and get orders to those markets.
“Discretionary trading is certainly harder than it once was. A lot of these individuals found their calling in the exchange pits, but advances in technology are changing the nature of that trading and making it harder for these individuals to develop the same intra-market level of expertise, and I suspect that individuals having the depth to be a stand-out discretionary trader will become even less prolific and might become a thing of the past as technology continues to advance,” commented Kaul.
Distribution models for CTA and macro strategies too have become incredibly diversified as managers growingly cater for sophisticated investors. Wire and brokerage houses continue to offer managed futures products to retail investors, although this model is slowly being augmented by increased opportunities in the regulated funds’ space via exchange traded funds (ETFs), 40 Act Alternative funds and Ucits.
However, the emergence of capital raising platforms in the early 2000s has given more institutionalised investors access to these funds. Furthermore, a lot of managers are bolstering their marketing teams and offering sophisticated investors access to their product via co-mingled funds or separately managed accounts. “The CTA space historically has offered more segregated accounts than co-mingled accounts and this appeals to conservative pension funds and big institutions,” highlighted Kaul.
Citi’s Futures Research and Business Advisory team surveyed 42 CTAs and hedge fund managers focused on liquid strategies, marketers, pension plans, funds of funds and consultants globally, representing $86.5 billion.