Managed futures/CTAs (commodity trading advisors) is a sector which has seen an uptick in assets since late 2015.
In October 2015 total assets in the sector stood at €2.46 billion globally. Since then the sector has gradually climbed, reaching highs of €5.37 billion in May 2017. However since this high, assets have once again dropped, with many selectors saying they are simply scratching their head on the sector.
But what is this down too? With many managed futures fund’s boasting hefty returns in big market events, Alpha Simplex’s Rob Sinnott said these returns do not merely come from corporate or political events alone.
‘When we look at the aftermath of Brexit we saw positive returns from many managed futures strategies, not just the short term reactive models but also the long term trend followers. If investors ask why did they do so well over the Brexit period, it’s because they held some short positons in peripheral European equity markets.
‘This alongside long positions in European and US fixed income as well as short positions in the pound. The most successful allocations at the time were not being taken because of the outcome of the Brexit vote itself but were instead motivated by the longer term secular movements in markets.’
Managed futures funds considerably picked up the pace the month after Brexit, and Sinnott (pictured below) argued that most returns over the period was not crisis alpha but crisis beta.
‘These were returns that were very good in a crisis, which happened to be held by various strategies like ours due to their longer term signals – not particularly because they reacted rapidly to a certain event such as the unexpected Brexit vote outcome.
‘CTAs have both crisis beta and crisis alpha. Part of the big returns in the 2008 financial crisis was from long held long bond exposures: crisis beta – as well as the tactical shorting of equity markets and the tactical shorting of currency and commodity markets to benefit the portfolio: crisis alpha.’
Launched at a time when managed futures seemed to be in a tight spot, Sinnott said when looking at the current environment for the sector – investors shouldn’t be asking what events could hurt CTAs, but what could hurt CTAs based on their longer terms holdings and longer term trend signals.
‘In the first two quarters of 2017, equity markets are one asset class that has continued to hold significant trends. If an investor holds just a long-term trend follower and there happens to be a reversal in equities – then that could be painful.’
‘Another trend we are seeing is the developments in the US dollar and fixed income. If the dollar rallied and there was a decline in equities and the managed futures programme you are invested in was just a long-only trend follower of fixed income, then that programme may have a tough time.’
In addition, Sinnott said if investors have a more traditional risk parity focused strategy, and experience an additional decline in fixed income, their experience could potentially be even worse.
‘While equities and fixed income have recently typically had negative correlations, if that correlation shifts to positive then the joint reversal may be even more costly because of the leverage used and the absence of expected portfolio diversification across these asset classes.’