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Momentum bias looms over CTA inflows despite January gains

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Investors’ bias towards momentum risk is making trend-following hedge fund strategies particularly sensitive to investor inflows, amid a recent spike in market volatility.

Lyxor Asset Management observed how future flows hinge predominantly on the cumulative performance of alternative strategies over a three-month period. On the flipside, investors tend to react to recent performance with a lag of three months.

As a result, flows into CTAs – which have enjoyed a strong positive start to 2020 – as well as long/short credit funds are the “most sensitive” to recent performance. Flows into global macro funds and event driven strategies tend to be less sensitive to past performance.

Société Générale’s SG CTA Index – which tracks the daily performance of a select pool of the largest trend-following managers – advanced 0.83 per cent in January. The SG Trend Index made 0.89 per cent for the year, while the SG Short Term Traders Index – which measures the performance of CTAs and global macro funds running short-term strategies – finished January up 2.61 per cent.

In a research note this week, Lyxor strategists observed how trend reversals in equity and bond markets have had a “moderate impact” on CTA performance in recent weeks. They added that recent returns suggest both long/short equity and long/short credit managers should experience inflows in the near term.

“Our stance on CTAs stands structurally at neutral as we find it challenging to time the momentum risk factor across asset classes,” Philippe Ferreira, senior strategist, cross asset research at Lyxor explained.

“We believe this is one of the most interesting strategies in the space of alternatives for long term investors: low correlation to traditional asset classes; higher returns than equities over the long run – 20 years – with much lower volatility and maximum drawdown based on the SG Trend Index and the MSCI World.”

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