Bearish bond bets help fuel CTA gains ahead of 2021’s midway point

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Trend-following hedge funds and CTA strategies remain in broadly positive territory heading into the final stretch of 2021’s first half, as defensive bets on fixed income look set to pay off against a backdrop characterised by economic recovery and rising inflation.

The 10 biggest trend-following managers, as tracked by Société Générale’s SG Trend Index, have gained 1.42 per cent on average so far this month, driving year-to-date returns to a solid 8.43 per cent.

Similarly, SocGen’s CTA Index – a daily performance measure of 20 of the largest managed futures hedge funds’ returns – has advanced 6.78 per cent since the start of the year on the back of upward trends in markets. On a monthly basis, the benchmark is up 1.09 per cent to the final week of May.

On the other hand, managed futures strategies built around shorter-term market trends have endured an altogether trickier time lately. The SG Short-Term Traders Index – a daily returns snapshot of CTAs and global macro managers with 10-day trading windows – remains positive for the year at 1.43 per cent, but its performance has eroded in May, with the index down 0.71 per cent so far.

As diversification across traditional asset classes proves challenging to source in the current environment, CTAs still offer major upside potential, according to Lyxor Asset Management.

Despite positive equities correlation, CTAs’ fixed income exposure is “virtually zero or negative”, Lyxor said in a recent commentary, with the sector covering Treasury shorts and turning short on European bonds. Long bets on commodities also serve as a hedge against rising inflation.

“As long as the rise in bond yields does not trigger an equity correction, which is our base case, CTAs have the potential to continue delivering attractive returns,” Lyxor said.

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Hugh Leask
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Editor, Hedgeweek