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Comment: A trendless yet eventful 2011 for CTAs

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Asset class performances were as hard to predict as ever during the first half of this year. While the global economic outlook has been more favorable than previously, sources of risk have shifted continuously, says Stefan Keller (pictured), head of MAP research and external relations at Lyxor Asset Management. As a result, unexpected shocks have derailed trends at work since the announcement of QEII end-August 2010. The unrest in the Middle East and North Africa has been on nobody’s agenda while the earthquake, tsunami and nuclear fallout in Japan were, by definition, unexpected.

Commodity Trading Advisors (CTAs) have given back performance so far this year. The recent investment environment has been trendless on both equities and commodities since the spring, proving particularly painful for trend followers. The downturn in industrial output and the softening of the U.S. job market, combined with the European Sovereign Debt crisis and monetary tightening in the EM have started to weigh on risk assets.

Weekly returns of long term CTAs on the Lyxor Managed Account Platform (MAP) back to January 2001 are close to a Gaussian distribution. Only the left tail (negative returns) can be considered fat, meaning that drawdowns are expected to happen more often and can be deeper than in the Gaussian case. Further, the two curves are asymmetric, with positive returns more frequent and higher than in the normal distribution. The current drawdown in long term CTAs is therefore by no means exceptional.
The transparency of the Lyxor MAP allows us to explain the current drivers of performance. Since the start of this year, the average (and median) exposure to equities and commodities is long. However, heterogeneity among managers has increased recently as some models have turned short on both asset classes recently. All trend following CTAs on the Lyxor MAP have now turned long on Bonds. This is a huge change compared to the start of the year when average exposure to that asset class was zero, with a small dispersion among the funds on the platform. The bond holdings clearly mitigated performance setbacks registered on equities and commodities.
Why do investors allocate towards CTAs? Clearly, their diversifying property in an allocation is the key attribute. Over a long-term period, CTAs show a negative correlation with the hedge fund industry and traditional asset classes, namely equities and bonds. Another striking fact is the absence of correlation with implied assets, such as the CBOE’s VIX index. As a consequence, adding CTAs to an allocation does, theoretically, improve the risk-return profile of an alternative or long-only portfolio. For that reason investors are currently ready to pay an insurance premium.


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