CTAs Deliver Strong Fundraising Despite Performance

The various indices and aggregates ended the year in the low single digits: the Societe Generale CTA Index at 2.3%, the SG Trend Index at 1.9%, the S G CTA Mutual Fund Index at 3.3%, and the Barclay CTA Index up 0.6% based on nearly half of funds reporting. The peer group of institutional quality managed futures managers tracked by bfinance showed a similar result, delivering returns averaging 3-4%.

Yet closer analysis of the managers reveals high dispersion in the performance of individual funds, with the bottom tier delivering -5% and worse, while the top quartile produced double digits, including some remarkable recovery stories after a slower first half.

What will this mean for investor appetite? During recent years, asset owner interest in CTAs and managed futures has often defied commentator predictions. After the losses of 2016, many expected that asset growth for CTA and Systematic Macro strategies in 2017 would be weak, but the reality has proven quite the reverse with healthy demand and capital flows. Indeed, CTAs have been one of the fastest growing segments of the hedge fund landscape.

We see a number of factors contributing to this growth, and currently expect the strong demand to continue in 2018, despite the far-from-glowing performance results.

The first and most obvious reason is the potential of CTAs to make meaningful gains in prolonged market declines and their implicit long volatility characteristics. With investors concerned about high valuations in traditional assets and keen to moderate equity beta, diversification has taken on even greater urgency. Managed futures allocations (diversified CTAs, core trend followers and systematic macro managers) are in the spotlight as part of risk-mitigation or ‘crisis alpha’ strategies.

Effective portfolio diversification should be installed up-front, with attempts at ‘timing’ downturns often proving unsuccessful. As such, investors are looking beyond CTA performance in isolation and instead focusing on marginal improvement to risk-adjusted returns in the portfolio context. That being said, investors seeking diversification have a variety of choices to consider; low net exposure Long/Short Equity, for instance, has produced much stronger results over the past 12 months.

The second factor supporting CTA allocations is a persistent appetite from allocators for quantitative strategies. Investors go through something of a ‘love/hate meta-cycle’ when it comes to quant investing, and the past few years have seen an unabated positive trajectory. Transparency, consistency of process, capacity, lower cost, and more effective use of the ever-expanding range of data sources have all helped to put quant back on top. All of these underlying themes remain strong into 2018.

One particularly intriguing debate, which we see playing out among bfinance’s clients around the world, is the interplay between standalone managed futures / CTA strategies and Alternative Risk Premia products. There is overlap between these two groups, both in terms of investment styles and the universe of instruments employed; core trend following strategies in liquid markets are often an integral part of many ARP strategies, as they are in the CTA universe.

While bfinance clients with direct managed futures allocations have generally held or slightly increased these positions throughout 2017, new allocations to managed futures have often been implemented through diversified Alternative Risk Premia allocations, either as an integrated part of multi-strategy products or as a satellite core trend following approach.

When it comes to 2017 performance, “alpha” CTAs have, as noted above, positively differentiated themselves from low-cost trend strategies during the past year. Yet diversified Alternative Risk Premia products have also delivered  decent returns, according to bfinance composite data.

To date, we don’t see evidence of ARP providers drawing assets away from the more alpha-focused CTA managers: the client groups are often rather different, with a significant proportion of ARP investors unable to consider the more expensive end of the CTA space. Yet the tension between these two, and the implications for fees, are continuing to create an interesting dynamic for the alternative investment industry.

Digging a little deeper, our analysis suggests that the stronger performers included many of those that we would categorise as "alpha-focused" and/or oriented towards more esoteric markets, while the lower-cost core trend following strategies were somewhat less successful as a group.