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The rise and fall of CTAs… for now

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2015 has been a challenging year for CTAs, as commodity market volatility has proved difficult to navigate; especially for systematic CTAs, which are down -1.48 per cent through the calendar year (up to end of October). According to alternative funds research provider Preqin, CTAs are down -0.39 per cent YTD and Fund of Fund CTAs are down -6.18 per cent. By contrast, the average hedge fund this year is up +2.45 per cent. 

Not that this is put investors off when it comes to incorporating CTAs into their portfolio; as Preqin’s Hedge Fund Spotlight for November shows, the number of investors allocating to CTAs has from 1,018 in 2014 to 1,050. 

Last year, Preqin’s end of year hedge fund investor survey revealed that 22 per cent of investors felt that CTA/managed futures returns fell short of expectations, compared to 19 per cent who felt they had exceeded their expectations. In 2014, CTAs generated returns of 10.85 per cent – the best returns since 2010 when they returned 15.70 per cent. It is unlikely that the satisfaction level is going to be as high in 2015, given the strategy’s poor performance. 

Indeed, Preqin’s mid-year investor surveys showed that 80 per cent of investors were dissatisfied with systematic CTA performance over the first half of the year, while 73 per cent were dissatisfied with discretionary CTA performance.

Those with the most faith in CTAs, currently, are Fund of Hedge Fund Managers (44 per cent). Family offices (11 per cent) are the most skeptical. 

Perhaps because of the challenge of global financial markets, the number of new CTAs coming to market in 2015 looks set to be the lowest since 2006. Only 50 new funds have launched, including the Systematic Alpha Short-Term Directional Program and Kaleidoscope Capital’s Kaleidoscope Prism Fund, compared to a total of 104 new launches last year. 

Systematic CTAs, which use sophisticated price signalling and trading algorithms to move in and out of global futures markets, have found the markets to be particularly troublesome ever since central banks sought to bring stability and reduce market volatility with quantitative easing. Last year, CTAs felt they had turned a corner; markets were operating more on fundamentals, allowing trends and stronger price signalling to emerge. But 2015 has been another risk-on risk-off period. 

As Preqin highlights, systematic CTAs last year made up 78 per cent of all CTA trading strategies. This year, they account for 68 per cent. At the same time, the number of trading strategies employing both a systematic and discretionary element has increased from 9 per cent to 14 per cent. It could be that the increasing number of systematic CTAs between 2008 and 2012 (and 2014) might start to enter a downward trend as managers take more of an active role in determining portfolio composition. 

Since the start of the year, discretionary CTAs have fared better than systematic CTAs, down slightly through October (-0.07 per cent) versus -1.48 per cent. Through March, systematic CTAs were way ahead of discretionary CTAs, making gains of 5 per cent or more but ever since they have been in free fall. Far less volatile, discretionary CTAs have been largely range-bound in performance, rarely exceeding 1 per cent throughout the year.

There have, of course, been some exceptionally strong performers in 2015. The rather aptly named ICA Aggressive Strategy is up 218 per cent, the Finamatrix Quant Fund is up 149 per cent and the Da Vinci K2 Tachyon Fund, is up 83 per cent. 

“We are not only systematic, in that our source of signal generation is news feeds, not just data feeds like quotes. That fundamental input provides additional information for our trading decisions. If surprising news hits the market we take aggressive positions in the FX, Fixed Income and Equity markets,” says Hendrik Klein (pictured), CEO, CIO and Founder of Da Vinci Invest AG. 

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