Uncertainty returns: CTAs slump to worst month of the year, as markets enter “new regime”

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Managed futures strategies slumped to their worst month of the year in September, with trend-following hedge funds caught out by sharp reversals in momentum across several markets and asset classes.

CTAs, which aim to profit from various trends across equities, commodities, currencies and fixed income through futures and derivatives trading, were hit by the sudden retreat from record stock market highs and US dollar weakness last month, Société Générale said on Tuesday.

Following a mixed first half of the year, the sector had started to gather pace over the summer, with July proving their best month so far. But September’s rapid reversal erased those gains, and now trend-following hedge funds face a new market regime underpinned by renewed uncertainty, said Tom Wrobel, director of alternative investment consulting at Société Générale Prime Services and Clearing.

SocGen’s main SG CTA Index, an equally-weighted measure of the daily performance of a group of the biggest CTAs reporting returns, lost 2.34 per cent in September. The index is now some 3.76 per cent in the red in the nine-month period since the start of January.

SocGen said that just four of the CTA Index’s 20 constituents recorded positive performance in September, all of which were non-trend or short-term CTA strategies.

The SG Trend Index fell 3.30 per cent last month. The index, which tracks the net daily gains of a 10-strong pool of the biggest trend-following based hedge fund managers, is down 2.65 per cent year-to-date.

Meanwhile, short-term CTAs continue to outperform the rest of the trend-following pack, owing to their ability to better capitalise on swifter market movements.

SocGen noted that almost half of all short-term CTAs were in positive territory in September, though the SG Short Term Traders Index was down slightly, at -0.76 per cent.

Overall, the index – which captures the daily performance of ten of the largest short-term, diversified CTAs with holding periods of under 10 days – remains up 2.35 per cent since the start of 2020.

CTA trend-followers would have benefitted from the continued upward momentum in many government bonds and interest rates, but “probably only to a small degree”, said Tom Wrobel.

“As markets enter a new regime, and uncertainty returns, CTAs will begin to adapt to the new environment,” he observed.

“With the US elections around the corner, and fresh concerns around Covid-19, CTAs are one of many non-correlated strategies institutional investors are focused on and learning more about.”

Wrobel added: “CTAs demonstrated their ability to deliver positive performance whatever directions markets move earlier in 2020, especially short-term CTAs which have demonstrated that they can adapt faster than some other strategies.”