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CTAs post exceptional returns in early 2018, says Lyxor

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Persistent trends across asset classes have continued to fuel CTA returns over recent weeks, writes Lyxor in the latest Weekly Brief from its Cross Asset Research team.

According to several benchmarks of performance, January is on track to see them delivering the highest monthly returns in a decade. Such exceptional performance results from the solid upward trend in equity indices, amid buoyant economic conditions globally and the soft pace of monetary retrenchment from central banks. Meanwhile, the current US earnings season is proving to be a good vintage so far, though less than 30 per cent of the companies listed in the S&P 500 have reported earnings at we go to press. This has nonetheless been enough to see the consensus revising upwards the 2018 earnings growth picture for the S&P 500 to 15.7 per cent at present from 11.8 per cent three months ago.
“CTAs have also benefitted from supportive conditions in other asset classes. Commodity prices are enjoying strong upward trends amidst solid demand conditions and lower oil supply in countries such as Venezuela. Their long positions on industrial metals have benefitted from better than expected economic activity in China. Then, their FX bucket was rewarding lately. In particular, the short positioning on the USD received a boost as the US administration appeared to back a weaker dollar in Davos last week. The long positioning on the Euro and the Canadian dollar versus the US dollar were a source of substantial gains as a result. The long positioning on EM currencies versus the USD also delivered gains. There is nonetheless one missing engine for CTAs: fixed income. The long stance on bonds was a source of losses over the course of January that partially erased their gains. According to our data, CTAs have already turned short US fixed income but remain substantially long on European bonds.
“Going forward, we maintain a Neutral stance on CTAs despite their strong recent results. The fact that most buckets contribute positively to performance is a strong asset. But the high net long position on equities is a source of risk in our view due the rich market valuation. We do not expect major trend reversals in equities or commodities in the near term, but refrain from adding to CTAs after the recent rally. A neutral stance on CTAs implies a 10 per cent allocation in a hedge fund portfolio (based on BarclayHedge data).”

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