Short-term CTAs to find footing in the current environment, says SAM

As a new report from Citi Prime Finance reveals that record allocations are held in CTA/macro strategies, Dr Alexei Chekhlov, Head of Research and Portfolio Management at Systematic Alpha Management (SAM), a New York based CTA, has said that “short-term systematic funds will find their footing in the current environment.”

CTA assets under management rose 52% between the end of 2007 and 2011, according to Barclayhedge. The turning point for CTAs came in 2008, the Citi report says, when they outperformed other hedge fund strategies and long-only managers. This led many institutional investors to look at ways to diversify their portfolios to weather periods of market volatility.

Still, many short-term CTA’s experienced a challenging time last year, as the global markets were transitioning to a new environment, characterized by the European debt crisis, high overall debt and near-zero interest rates in the developed world. However, as markets settled into this new, more volatile regime and the basic properties of the statistical sample became reasonably stationary, short-term CTAs like Systematic Alpha Management have once again been able to find an abundance of opportunities.

“It is generally known that periods of rapid regime change present a challenging environment for systematic trading strategies, which rely on inferences from immediate past statistics to generate their trading signals,” Chekhlov says. “This is particularly true for short-term managers, as short-term price changes could be more influenced by the properties of a statistical sub-sample. Last year was such an environment and it presented a major challenge to many of these strategies.

“Once a regime transition has taken place, leading to some sort of new equilibrium, systematic strategies tend to start humming again.”

Prior to this year, SAM had been trading its flagship market-neutral strategy, which aims to capture alpha from reversion to the mean of relationships between the most liquid global equity, currency and commodities markets. In January 2012, SAM launched a Multi Strategy program, which blends its market-neutral mean-reversion trading strategy with several short-term directional strategies. The latter trade a broader range of futures instruments, including commodities, fixed income, currencies, as well as equity indices.

“The motivation behind the launch was to reduce our dependence on any one particular environment in order to generate more consistent alpha,” says Chekhlov.

Since its launch in February 2012, the Multi Strategy program has done exactly what it was designed to do – produce uncorrelated absolute returns navigating through tough and constantly changing market conditions.

Chekhlov adds that: “if the transition to a new regime, which begun in 2011, is well underway, our models could be once again well-positioned to derive meaningful signals from recent statistical samples of the markets we trade in.” Indeed, year-to-date, the Multi Strategy program has been among the top CTAs listed on the AlphaMetrix platform.

Systematic Alpha Management’s CEO, Peter Kambolin (pictured), says: “The choppy environment we’ve been experiencing since August of 2011, with the increase in volatility, as measured by the VIX, has also been positive for our flagship trading strategy, which has generated positive returns in 7 of the last 9 months. Many indications are pointing to the current environment of uncertainty continuing through the summer and possibly beyond and this may continue to act as a tailwind for us.”