Institutional investors are rapidly embracing commodity-trading advisors — despite the fact that these funds have trailed other hedge fund strategies for several years running.
The number of institutional investors in hedge funds actively investing in CTAs has surged in the past five years, up to 713 in 2012 from 504 last year and just 331 in 2008, according to a new study from London-based Preqin, which provides data and research on alternative investment funds.
So why the appeal? Preqin says institutions are placing money with the strategy because CTAs — also known as managed futures funds — are transparent in terms of what’s in their portfolios and are highly liquid. They are also much less correlated to indices like the S&P 500 and hedge funds that use it as a benchmark.
These traits became highly desirable among institutional investors following the 2008 market meltdown, when many investors discovered that the managers they were invested in were less liquid and more correlated to the stock market than they thought. But investors these days are still seeking more diversification within their portfolios, in the hopes this will reduce volatility.
While institutions are increasingly allocating assets to CTAs, they are not exactly getting great performance in return, however. Sure, CTAs were the star of the investment show in market-ravaged 2008, racking up gains of 19.11 percent compared with an average loss of 17 percent for hedge funds in general that year.
Since then, however, CTAs have lagged other hedge fund strategies. Over the past three years, on an annualized basis, CTAs have trailed hedge funds by more than 2.5 percentage points per year. In the past 12 months ending in September, CTAs eked out just a 0.35 percent return versus 8 percent for hedge funds.
CTAs follow several strategies: trend following, macro, pattern recognition, counter trend, option writing and arbitrage, Preqin notes. By far the most popular strategy is trend following, used by 70 percent of managed futures funds, according to Preqin. This involves using technical analysis to identify short- and long-term trends in a wide variety of financial markets. Rapidly-changing, roller-coaster-like markets — as we have experienced for the past few years — are the biggest enemies of trend followers. Macro is used by 21 of all CTAs, Preqin notes.
CTAs are especially popular with European investors. One-quarter of European institutional investors are invested in the strategy, compared with 23 percent in the Asia-Pacific region and just 15 percent in North America.
Public pension funds are the institutional group most interested in CTAs, with 25 percent allocating money to the strategy. The biggest group in general is funds of funds (42 percent).
According to Preqin’s database, there are 429 CTA managers running a combined 1,298 CTA vehicles. In the past three years, there were a combined 454 launches compared with 293 in the previous three years.
Among the largest are the Man AHL fund (managed by Man Group), the BlueTrend Fund (managed by BlueCrest Capital Management) and the Winton Futures fund (run by Winton Capital Management), all based in London.
Through September this year, Man AHL Diversified was essentially flat for the year, Blue Trend was up 2.33 percent while Winton Futures was down 5.80 percent. "The choppy market conditions seen in 2012 have proved difficult for CTA vehicles that pursue trend-following strategies, as it is hard to see clear trends in the market, particularly with high levels of government intervention,” Prepin points out in its report.