CTA/managed futures hedge fund strategies account for almost 11% of the global hedge fund assets under management (AUM), accounting for US$250.3 billion as of October 2016. While the global hedge fund industry has seen redemptions of US$16.6 billion in 2016; the highest on record since 2009, CTA/managed futures strategies have continued to attract investor capital for the second consecutive year in a row. The strategy has seen net investor allocations of US$12.2 billion in 2016, following capital inflows of US$29.0 billion in 2015. Average index returns for the strategy have been muted over the last two years (this following their strong showing in 2014 when the Eurekahedge CTA/Managed Futures Hedge Fund Index was up 9.62%), the prospect of uncorrelated returns, both to traditional and hedge fund mandates adds much to the appeal of CTA/managed futures hedge funds in an investor’s portfolio.
While the traditional hedge fund strategies had a rough start to the year with the MSCI AC World Index (Local) down 7.05% in the January 2016 to February 2016 period, CTAs were up an impressive 3.06% with underlying trend following constituents gaining 4.39% as markets trended lower over China’s growth prospects and the plunge in oil prices. A similar picture emerged later during the Brexit month in June when CTAs were up 2.33% while underlying markets and traditional hedge fund strategies ended the month flat-to-slightly-negative. However, three consecutive months of losses for CTAs in the period ending October have eroded their lead with the strategy down a flat 0.09% for 2016 - with underlying trend following and FX strategies down 2.20% and 1.58% respectively, while commodity focused funds are up an impressive 7.83%.
Figure 1 below shows the performance of CTA/managed futures managers (and its major sub-strategies) since December 2007 against the backdrop of wider equity market performance as denoted by the MSCI World Index (Local). CTAs have outperformed the wider market, thanks in large part to their solid gains during the market downturn of 2008 which has over the years been the key part of their appeal to investors looking to improve the risk-return profile of their portfolios. The MSCI World Index declined 41.24% in 2008, with CTA/managed futures managers outperforming them by almost 61% as they posted gains of 19.45%.
Figure 1: CTA/managed futures strategies since 2007
Table 1 shows detailed performance statistics over the past eight years. Key takeaways include:
- CTA/managed futures managers preserve capital in down markets – in 2008 and 2011, CTA/managed futures managers outperformed underlying markets by 60.7% and 11.4%.
- Since 2011, CTA/managed futures strategies have seen returns in the low single digits – barring 2014 when shorts on energy futures helped CTAs post the best returns among all strategies.
- FX dedicated constituents of the CTA/managed futures space have posted the best risk-adjusted returns over the past five, three and two year periods, in large part due to their low annualized volatilities.
Table 1: Historical returns for volatility strategies
Eurekahedge CTA/Managed Futures Hedge Fund Index |
MSCI AC World Index (Local) |
Eurekahedge Commodity Hedge Fund Index |
Eurekahedge FX Hedge Fund Index |
Eurekahedge Trend Following Index |
|
|---|---|---|---|---|---|
| 2008 | 19.45 |
(41.24%) |
(7.42%) |
6.09% |
29.74% |
| 2009 | 6.65% |
28.28% |
17.86% |
5.44% |
5.18% |
| 2010 | 13.47% |
10.11% |
16.87% |
6.18% |
11.36% |
| 2011 | 2.31% |
(9.09%) |
(1.53%) |
8.89% |
0.71% |
| 2012 | 2.65% |
13.55% |
(0.57%) |
3.85% |
(1.86%) |
| 2013 | 0.54% |
23.91% |
(6.00%) |
3.52% |
1.02% |
| 2014 | 9.62% |
6.79% |
3.65% |
6.08% |
13.44% |
| 2015 | (0.40%) |
(0.49%) |
(4.81%) |
6.05% |
(2.18%) |
| 2016 Oct | (0.09%) |
1.95% |
7.83% |
(1.58%) |
(2.20%) |
| 5 year annualised returns | 2.65% |
8.45% |
(0.33%) |
3.68% |
1.51% |
| 5 year annualised volatility | 4.24% |
10.07% |
4.63% |
2.67% |
7.14% |
| 5 year Sharpe Ratio (RFR=1%) | 0.39 |
0.74 |
(0.29) |
1.00 |
0.07 |
| 3 year annualised returns | 3.45% |
3.90% |
1.78% |
3.62% |
3.02% |
| 3 year annualised volatility | 4.73% |
10.06% |
4.52% |
2.82% |
7.83% |
| 3 year Sharpe Ratio (RFR=1%) | 0.52 |
0.29 |
0.17 |
0.93 |
0.26 |
| 2 year annualised returns | 1.46% |
1.49% |
1.84% |
3.39% |
0.86% |
| 2 year annualised volatility | 5.31% |
11.43% |
4.58% |
2.83% |
8.79% |
| 2 year Sharpe Ratio (RFR=1%) | 0.09 |
0.04 |
0.18 |
0.84 |
-0.02 |
Source: Eurekahedge
In Figure 2, the asset growth for CTA/managed futures strategies since 2008 is displayed. While traditional long/short equity strategies posted steep performance-based declines and saw massive redemptions, CTAs emerged almost unscathed from the crisis of 2008. This was on account of two factors, firstly, CTAs posted double digit gains in 2008 while other strategies were deep in the red; secondly, on account of the inherent liquidity in the strategy, managers were able to meet redemption requests without causing any panic to investors that were flooding through the exit. Asset growth for CTAs has trended upwards since 2008 with managers’ asset base growing by 56.9% over this period. While the period of 2011 to 2014 saw the sector stagnate, investor allocations have picked up since 2015 which has helped CTAs grow their asset base by almost 22.7% over the past two years.
Investor allocations (net flows) have trended slightly lower this year, with US$12.2 billion of net capital flows into the strategy for 2016, down from US$27.5 billion over the same period last year. However, given a year which has seen overall redemptions from hedge fund strategies, this is still quite an achievement.
Figure 3 shows the launch/closure activity for CTA/managed futures managers. In recent years, launch activity has declined while closures have been inching upwards. Overall, the net growth in the number of CTA/managed futures managers has come down substantially over the last five years. A couple of reasons that explains these trends:
- The bulk of investor flows have chased the larger hedge fund offerings since 2008 given a preference for the big brands as well as their institutional quality governance structures that inspire confidence in their offerings. This has stagnated growth for the small to mid-sized players and has in effect raised the barriers to entry for smaller players with great ideas but little investor backing. For more details on the investor flow activity across hedge fund sizes please see our Asset Flows Update report.
- Average performance and management fees for new fund launches are in decline. This makes it difficult for smaller entrants already grappling with regulatory and compliance related costs to break even and hence puts the survival of otherwise good ideas at risk.
- The macro outlook for markets has been tough as performance-based gains are hard to come by with CTA/managers posting their first annual decline on record in 2015. With existing managers struggling to break past their former high water marks and their future performance based fee- gains uncertain, the mid-term business viability for small to mid-sized funds could be challenging.
- In addition, the top 5 CTAs in terms of investor allocations over the last five years have seen combined inflows of almost US$30 billion, with their compound returns over this period varying from 13% to 55%. Detailed analysis reveals that performance alone does not appear to be the guiding factor behind these inflows, other factors such as the brand name, fund marketing and the quality of the fund set up may perhaps explain this tilt better.
Key takeaways from the correlation matrix below computed over the period starting Jan 2008.
- CTA/managed futures strategies offer uncorrelated returns to underlying markets and other hedge fund strategies such as the traditional equity long/short.
- CTA/managed futures strategies have the highest correlation to their underlying trend following constituents, which underscores the importance of trend following or momentum based risk premia in explaining the source of return behind CTA strategies.
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