CTAs 2015 Performance Update by Preqin
This month’s Hedge Fund Spotlight takes an in-depth look at CTAs and their outlook for the future, including:
- Performance update: we look at returns in 2015 and compare the performance of systematic and discretionary CTAs.
- Launches: we see which types of trading methodologies/strategies are being most used by newly launched CTAs.
- Institutional investor activity: we assess investor activity in CTAs in light of poor returns in 2015 and look at where future allocations to CTAs are likely to come from.
2015 Performance Update – CTAs
This month, Christopher Beales takes a look at the recent performance of CTAs and how specific events have resulted in falling CTA fund returns.
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Despite a strong start to 2015 for CTAs in Q1, commodity market conditions have made return generation difficult for fund managers over much of the rest of the year to date. Oil production levels from US shale and OPEC operations resulted in the price of oil dropping to record lows. As the world’s leading metal consumer, decreases in China’s demand for ‘early stage’ metals caused a fall in steel, iron ore and copper prices. US natural gas prices plunged to their lowest levels since April 2012 on the back of large reserves, and a mild start to the 2015 winter has also resulted in reduced demand. Commodity market conditions have therefore rippled through the corporate world, with oil giant BP’s total third-quarter revenue dropping to $55.9bn in 2015 compared with $94.8bn the previous year. Furthermore, Glencore suffered one of the worst trading days in FTSE 100 history, as the firm’s share price dropped 29% amid concerns regarding commodity prices and the uncertain future of Chinese growth. These events have all impacted the performance of CTAs.
In 2014, CTAs generated their highest annualized return (+10.85%) since 2010 (+15.70%). The run of positive performance continued into 2015, and the Preqin All-Strategies CTA benchmark added 4.29% in Q1 2015. However, as shown in Fig. 2, the second quarter of the year was the most difficult for CTAs, with these funds making losses of 3.74%. All leading CTA benchmarks – funds of CTAs, systematic CTAs and discretionary CTAs – posted negative returns over this quarter; the third-quarter return was also in negative territory. As of October 2015, Preqin’s Hedge Fund Analyst shows that the All-Strategies CTA benchmark is negative for 2015 YTD, making a loss of 0.39%, behind the Preqin All-Strategies Hedge Fund benchmark (+2.45%). The strong performance of hedge funds (+2.07%) in October has taken the 2015 YTD return to nearly three percentage points higher than that of CTAs – which in comparison posted -0.61% – representing the benchmark’s sixth monthly loss of the year.
Systematic CTAs’ strong start to 2015 resulted in cumulative gains of more than 5.00% by March (Fig. 4). However, negative returns over of the majority of the year so far has left the 2015 cumulative return underwater and, as of 31 October 2015, the Preqin Systematic CTAs cumulative benchmark return is -1.48%. Although the losses of discretionary CTAs have been smaller than their systematic counterparts, the Preqin Discretionary CTAs benchmark is also in negative territory for 2015 YTD (-0.07%).
CTA Launches and Inflows
Alastair Hannah takes a detailed look at CTA launches, different trading methodologies, strategies and markets traded, as well as providing an outlook for the rest of the year.
Fifty CTAs have launched in the first nine months of 2015 to 30 September (Fig. 1). Although the number of funds launched this year is likely to grow as managers bring new funds to market in the final quarter, and also due to more data becoming available, 2015 looks set for the fewest CTA launches since 2006. Similarly, the proportion of CTAs launched, as a fraction of all hedge fund products incepted each year, has decreased to its lowest level since 2006, at 9% as at 30 September 2015.
At the start of 2015, Preqin noted that demand for CTAs from investors would be relatively small in the year ahead. Our H1 2015 Investor Outlook, based on interviews with over 300 investors, showed that just 14% of CTA investors planned to increase their allocations over 2015, with 10% planning to decrease their exposure. However, CTAs witnessed modest inflows of $6.4bn during H1 2015 with 45% of existing CTAs showing net inflows in Q2, a greater proportion than hedge funds (41%). Despite this, concerns over the performance of the sector remain. Preqin’s mid-year investor surveys showed that 80% of investors were dissatisfied with systematic CTA performance over the first half of the year, while 73% were dissatisfi ed with discretionary CTA performance.
As a result, CTAs are operating in a challenging environment with a fall in commodity prices, poor performance and declining investor sentiment. The decline in new fund launches may be a result of fund managers focusing on existing products before taking new funds into the currently troublesome market.
Trading Methodologies, CTA Strategies and Markets Traded Systematic-only strategies dominate the CTA industry; however, the proportion employing a systematic methodology has fallen over the last year (Fig. 2). From 2008 to 2012, systematic strategies accounted for an increasing proportion of funds’ trading methodologies, from 51% to 78% respectively. A sustained bull market and a reduction in volatility in global markets since 2009 has sometimes challenged the effectiveness of the systematic trading method, which relies heavily on large price movements and wide bid/ask spreads on securities. So far, 2015 has witnessed a reduction in the number of CTAs utilizing pure systematic strategies and growth in the amount using either a mixture of discretionary and systematic strategies, or a pure discretionary approach (Fig. 2). As at September 2015, 14% of new CTA launches this year employ a combination of both discretionary and systematic trading strategies – the largest proportion of funds using both strategies since 2009 – as portfolio managers in the sector seek enhanced flexibility.
Fig. 3 shows that the majority of CTAs (64%) use a trend-following strategy. With commodity prices suppressed, CTAs can still use a wide range of other assets, offering diversification and an effective hedge for investors within a portfolio otherwise strongly correlated to traditional markets. Currency markets remain the dominant area of focus for the majority (67%) of CTAs (Fig. 4), with stock indexes the second most common market traded by CTAs.
CTAs exist as a true alternative to traditional products, offering an effective hedge against difficult economic environments and market downturns. The poor performance of the sector in the years of the bull market has hit investor confidence in the asset class, and it has become increasingly difficult for CTAs to raise capital. In 2015, we have seen relatively few new launches in the managed futures sector, as fund managers focus on existing products or other strategies. The current market environment, however, may re-establish the value of CTAs as a non-correlated asset within diversifi ed portfolios, to add some downside protection for investors. In turn, we may see renewed launch activity in this space.
Institutional Investor Activity in CTAs
Joseph Lee and Mark Cunha take a look at the activity of investors in the CTA space in light of recent investor dissatisfaction over poor returns in 2015, and examine which investor types are most interested in making CTA investments.
While CTA fund managers battle tough market conditions, investors in the strategy will be hoping the sector can return to the positive performance it posted in 2014. Although the wider hedge fund industry saw poor performance in 2014, CTAs posted positive returns, generating 10.83% for the year – the strategy’s best annual return since 2010. However, the first half of 2015 proved difficult, in which first-quarter gains were all but wiped out, leading to investor dissatisfaction with CTAs. Preqin’s H2 2015 Investor Outlook reveals that 80% and 73% of investors in systematic and discretionary CTAs respectively felt these funds had not met return expectations.
Despite low single-digit returns – excepting 2014 – since 2011 and negative returns in 2015 YTD, CTAs continue to hold a space in many investor portfolios. Today, over 1,050 institutional investors actively invest in CTAs – an increase from 1,018 at the same time in 2014 (Fig. 1). In fact, the number of institutional investors active in CTAs has been rising annually since 2008. The strategy’s ability to protect assets during periods of rising asset class correlations or volatile investment climates, as proved in 2008, is attractive to investors. However, investor sentiment for managed futures has been rather tepid in 2015; at the start of the year only 14% of investors in these funds planned to increase their exposure, and in turn inflows have been relatively small ($6.4bn) in the first half of the year.
Approximately 44% of funds of hedge funds express an interest in CTAs (Fig. 2). Large institutional investors such as sovereign wealth funds (31%) and public pension funds (29%) also show a relatively stronger appetite for CTA strategies compared with other investor groups. These investors will have significant portfolios of funds, in dollar terms, compared with many other investors, and favor a diversified approach to investment in hedge funds. At the opposite end of the scale, family offices and endowments are among the most long-term, experienced investors in hedge funds, but display considerably less of an appetite for CTAs. Just 13% and 11% of endowment plans and family offices respectively currently have a preference for CTA investments.
Europe-based investors show the greatest appetite for investment in CTAs: currently, 27% of investors in the region consider investment in the strategy (Fig. 3).
Even though the number of investors interested in CTAs continues to grow, investors have expressed prolonged dissatisfaction with the performance of the strategy. Managers of these strategies will have to adapt to meet growing investor demands originating from a larger and more diverse set of institutions, as well as proving their worth longer term to gain capital inflow.