Macroeconomic factors caused major fluctuations in commodity and currency markets over 2017. We look at how these developments have impacted the CTA markets, including performance, fund launches, strategies and investors.
Volatility and fluctuations in commodity and currency markets have continued to drive trends in the managed futures/CTA industry in 2017: numerous highprofile elections in Europe saw the euro fluctuate as markets responded to the election victories of Mark Rutte, Emmanuel Macron and Angela Merkel. The Brazilian real weakened in May amid corruption allegations against President Temer, and strong growth in US GDP over the course of Q3 2017 saw the US dollar strengthen. In July, the price of copper hit a two-year high following reports that China might move to ban imports of scrap metal; and while the price of gold fluctuated over the course of the year, the safe-haven asset has gained from the lows seen in January 2017. Oil saw a sharp trend reversal in the middle of 2017, as Saudi Arabia and Nigeria announced plans to cut its production, and US output showed signs of a slowdown; these events drove the price of crude oil to its biggest daily and weekly gains of 2017, kick-starting a trend by which the price of crude oil continued to rise in Q3 2017 to over $50.
Performance In 2017
These trend reversals and volatile conditions are reflected in the 2017 return of the Preqin All-Strategies CTA benchmark: below water for four months and above for five months of the year, the benchmark sits at -0.04% as at September 2017 (Fig. 1), a stark contrast to the nine positive months and 8.04% return of the Preqin All-Strategies Hedge Fund benchmark over the same period. With CTAs providing potential diversification from equity markets, they have struggled in a year which has seen major stock markets around the world continuously reach record highs.
Q1: -0.49%. The first quarter of 2017 saw price swings across various commodity markets create challenging conditions for CTA managers. The US dollar recorded its worst January in three decades, only to rebound to seven-week highs in late February amid expectations of an upcoming Federal Reserve interest rate hike. Copper experienced strong price swings as a potential increase in US infrastructure spending pushed up the price of metal, only for value to drop as concerns around supply eased. CTAs ended February relatively neutral as losses in March drove the quarterly return underwater, with trend-following strategies finding these price-reversing conditions particularly challenging, posting a loss of 1.19%.
Q2: 0.13%. CTAs were in the black for the second quarter of 2017; however, the 0.13% return did not offset the Q1 losses. The quarter began well with gains in April (+0.51%) and in May (+0.46%), but a loss of 0.83% in June all but erased previous gains. In Q2 2017 there was significant fluctuation in the price of crude oil. Late into May, OPEC announced that it had agreed to extend production cuts into 2018; however, markets responded negatively – perhaps hoping for deeper or longer cuts – prompting the price of crude oil to drop by 5%. Falling oil prices continued into June and reached 10-month lows as WTI crude oil fell below $43; however, a decrease in the US oil rig count, as well as more demand from China, drove prices up, as the commodity ended its worst H1 in almost two decades on a more positive note.
Q3: 0.32%. As seen in Fig. 2, all CTA sub-strategies posted a positive return in Q3 2017, with the Preqin All-Strategies CTA benchmark posting returns in the first two months of the quarter. Oil prices continued to rise throughout Q3 2017, with Brent crude oil reaching its highest price levels in over two years by the end of September. Counter trend strategies that look to pick the top and bottom of the market returned 0.90% in Q3 following strong gains in July (+0.65%) and August (+1.06%) amid the reversing oil prices. Gold prices delivered similar returns to CTAs in Q3 2017, with gains in July and August offsetting a loss in September, as geopolitical tensions drove investors to buy the precious metal before hawkish sentiment on interest rates from the Fed caused the value of gold to fall.
While the majority of CTA strategies have delivered negative or neutral returns in 2017 YTD (as at September), CTAs pursuing option-writing strategies have returned 7.63% over the same period (Fig.
2), outperforming credit (+6.13%) and relative value strategies (+3.28%) hedge funds. This marks another strong year for option-writing strategies after posting the highest annual CTA sub-strategy returns in 2015 and 2016.
Discretionary vs. Systematic
Continuing the trend seen in 2016, man continues to outperform machine: discretionary-traded CTAs delivered gains of 0.75%, compared to the loss of 1.02% recorded by systematic models in 2017 up to September. Discretionary CTAs have offered the most robust risk/return profile across both time periods seen in Fig. 3, with the overall CTA industry as well as both trading methodologies delivering stronger returns with less volatility than the S&P GSCI Index.
Funds And Fund Managers
Launches and Liquidations
Over 2017, the number of active CTA vehicles has decreased, as fund closures outnumbered launches. Forty-one new funds entered the market, while 44 have closed for business over the course of the year so far (Fig. 4), taking the total number of funds in the industry to 1,212.
Although the number of CTA launches has declined for a fifth successive year, CTAs in fact represent an increased proportion of all hedge fund launches in 2017 as the wider industry witnessed a greater slowdown in launches. CTAs represent 9% of all hedge funds launched in 2017 as at September, the largest proportion in four years. The proportion of CTA launches represented by discretionarytraded vehicles has increased significantly in 2017; following stronger performance in recent years, discretionary-trading CTAs represent nearly one-third (32%) of all launches in 2017, a 21-percentagepoint increase from 2016, and the largest proportion since 2008 (Fig. 5).
Strategies and Instruments
Trend-following strategies continue to dominate the CTA industry, representing over two-thirds (68%) of active vehicles, despite the strategy’s recent underperformance compared to the wider CTA benchmark. Just one in 10 CTAs operate an option-writing strategy, the top performing strategy over the past three years. Option-writing strategies make up a similar proportion (9%) of CTAs launched in 2017, including a UCITS vehicle launched by the $4bn New York-based manager Neuberger Berman.
A greater proportion (66%) of CTAs trade stock indices than in 2016 (59%), perhaps in an attempt to capture some of the stock market upside seen in 2017 (Fig. 6). Currencies and energy remain some of the most traded assets by CTAs, two markets that have seen great volatility in 2017, perhaps offering insight into driving forces behind the fluctuating returns of CTAs over the past 12 months.
Investors In CTAs
Asset Flows
As seen in Fig. 8, since the beginning of 2015 investors have allocated a net $64bn to CTAs, while other hedge fund strategies have recorded net outflows: investors have withdrawn a net $11bn from equity
strategies over this period. Investors have continued to seek exposure to CTAs in 2017, allocating $14bn over the course of the first three quarters of the year, driving industry assets to $262bn as at September. With stock markets continuing to reach record highs, investors are perhaps looking to add protection against a possible market correction, which is one of the benefits CTAs can provide for an investment portfolio.
Following these inflows, it is perhaps unsurprising to see the number of institutions active in the CTA market increase: Preqin currently tracks 1,084 investors actively invested in CTAs, a 2% increase from the end of 2016 (Fig. 9).
The largest proportion of funds of hedge funds invest in CTAs; 42% of all funds of hedge funds have exposure to these products (Fig. 10). Sizeable levels of other investors with significant allocations to hedge funds are also invested in CTAs: 29%, 28% and 26% of all sovereign wealth funds, superannuation schemes and public
pension funds with portfolios of hedge funds respectively include CTAs as part of this allocation.
Outlook
Changeable commodity and currency markets have created a challenging investment environment for CTAs in
2017. Reversing trends, price volatility and market uncertainty have impacted the ability of many CTAs to generate meaningful returns, and the number of CTAs active in the marketplace decreased for the fifth consecutive year.
Investor appetite for the strategy, however, remains strong. The CTA investor universe has grown over the course of the first three quarters of 2017, with these investors adding a net $14bn to CTA vehicles so far this year. Furthermore, in Preqin’s June survey of active investors in hedge funds, a greater proportion of respondents indicated plans to increase (20%) their exposure to discretionary CTAs than to decrease it (13%). Should investors be looking to protect their portfolios from potential market correction, CTAs and their uncorrelated returns could provide a solution.
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