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CTA/managed futures hedge funds gained 5.89% over the first three quarters of 2021, thanks to the sharp increase in commodity prices, particularly in the energy sector over the recent period. In early 2020, energy prices reached uncharted territory as the COVID-19 outbreak resulted in a global economic shutdown, which completely dampened the demand for oil. As a result, the value of crude oil dropped to zero, and its contract value in the futures market fell to negative territory, which was unprecedented for the oil industry. Going into the second half of 2020, as the pandemic lingered and resulted in higher unemployment across the globe, most countries gradually eased their restrictions to support their economy from the crisis. In 2021, supported by the speedy vaccine rollout which allowed businesses to operate at a higher capacity combined with extremely accommodative economic policy, the global economy continued to recover from the crisis. As a result, the US economy recorded economic growth of 6.3% and 6.7% in the first two quarters of the year. The series of positive developments acted as a tailwind to the prices of oil, with the West Texas Intermediate crude oil nearly tripling its price over the entire course of 2H 2021, hurting crude-importing countries which are still in the phase of their economic recovery. As a result, the US government pressured OPEC+ to increase the level of production to help stabilize oil prices. However, the latter refused the former’s demand and stuck to their oil production plan. By the end of Q3 2021, crude oil prices rebounded to above US$80 per barrel – the highest level since 2014.

Figure 1: Performance of the CTA/managed futures hedge fund vs comparable benchmarks

Figure 1 shows the performance of the CTA/managed future hedge funds against other investment vehicles and benchmarks. CTA/managed futures hedge funds generated an annualised return of 3.69% since end-2012 as represented by the Eurekahedge CTA/Managed Futures Hedge Index, outperforming their commodity hedge fund peers as reflected by the average annual return of 2.79% of the Eurekahedge Commodity Hedge Fund Index. On the other hand, macro hedge funds outperformed both CTA/managed futures and commodity hedge funds by generating an annualised return of 4.69% over the same period.

Table 1: Performance in numbers: CTA/managed futures hedge funds vs comparable benchmarks

Source: Eurekahedge

Table 1 provides the detailed risk return statistics of the four indices shown in the figure above. Key takeaways include:

1. Over the last nine years, CTA/managed futures hedge funds consistently generated positive returns except in 2018 when the mandate recorded a loss of 3.17%. In comparison, commodity hedge funds recorded positive returns in six out of nine years and did exceptionally well in 2020 and 2021, posting two consecutive years of double-digit returns.
2. In terms of annualised volatilities, CTA/managed futures funds recorded the smallest annualised standard deviation of 4.57% over the last three years, outperforming both their macro and commodity hedge fund peers which posted 3-year annualised standard deviations of 4.97% and 6.78% respectively.
3. It is also worth noting that in 2014 and 2015 when the S&P GSCI declined by at least 30% over two consecutive years, CTA/managed futures funds maintained their winning edge by recording 9.65% and 1.23% returns over these periods, compared to the 4.18% and -4.84% returns of commodity hedge funds.
   

Table 2: Correlation matrix

Source: Eurekahedge

Table 2 shows the correlation matrix of the Eurekahedge CTA/Managed Futures Hedge Fund Index and other comparable benchmarks. Surprisingly, the performance of CTA/Managed futures displayed no relationship with the movement of the S&P GSCI Total Return as evidenced in their correlation of 0.02. On the other hand, the performance of commodity hedge funds and the S&P GSCI are moderately correlated with a correlation of 0.51.

Figure 2: Annual performance distribution of CTA/managed futures hedge fund

The chart above shows the annual performance distribution of CTA/managed figures hedge funds since 2013. In the last three years, the top 10% of CTA/managed futures hedge funds have generated returns of more than 20%, while the bottom 10% have limited losses to no more than -11%. In 2021, the bottom 10% of CTA/managed futures hedge funds posted an average loss of 5.97%, the lowest loss since 2013. It is also worth noting that CTA/managed futures hedge funds recorded three consecutive years of positive median returns from 2019 to 2021.

In conclusion, commodities investing has been traditionally used as a way for investors to hedge themselves against inflation and diversify their portfolios due to the low to negative correlations of commodities to traditional asset classes like stocks and bonds. Driven by the extremely accommodative economic policy by the central banks and governments to support the global economy from the pandemic, consumer prices skyrocketed causing concerns among investors of higher inflation rates in the future. On the hedge fund side, this would likely contribute to increased demand for CTA/managed futures hedge funds as investors consider allocating a portion of their portfolio to commodities such as gold and oil to hedge against the risk of rising inflation. In the near term, the refusal of OPEC+ to increase the level of oil production would also be an important factor affecting the performance of CTA/managed futures hedge funds. In addition, as evidenced in the high 3-year and 5-year annualised volatilities of the S&P GSCI Total Return and low 3-year and 5-year Sharpe Ratios, it is important to take note that investing directly in commodities is risky and does not yield a good reward given the amount of volatility the investor has to stomach. On the other hand, CTA/managed Futures hedge funds have historically generated much lower annualised volatilities and higher Sharpe Ratios. These characteristics make them an excellent alternative for investors who are looking to diversify their portfolios away from traditional asset classes and lower the overall volatility of their portfolios.

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