Interest in macro and liquid commodity trading advisors (CTAs) hedge funds has significantly picked up since 2008, with a growing number of institutional investors allocating to the relatively niche strategy, according to a new report by Citi Prime Finance.
However, the study notes that as a result of the increased institutional client base, many of the largest CTA funds have had to adjust their trading approach by significantly cutting the volatility and expected returns on their portfolios – the qualities that had helped generate performance and attract interest to the strategy in the first place.
Additionally, Asian institutions may not be as forthright in allocating to CTAs as their peers in the West, with one fund manager quoted in the report as saying: “There is tremendous wealth in the Middle East and Asia and you’d think that we’d see a big influx of this money, but we haven’t.”
The report is based on a survey of 42 CTAs, fund of funds, and hedge fund managers worldwide which represent $86.5 billion in AUM.
On a global basis, CTA assets under management rose 52% between the end of 2007 and 2011, BarclayHedge figures indicate.
Asian CTAs have seen a similar growth rate with $10 billion in AUM now, compared with $4 billion in 2005, according to Singapore-based data provider Eurekahedge.
Assets have expanded in tandem with the mix of clientele. CTAs were initially offered to retail investors but saw a turning point in 2008, when they outperformed other hedge fund strategies and long-only managers. This led many institutional investors to look at ways to diversify their portfolios to weather periods of market volatility, according to Citi.
“There has been a huge migration of pensions into the CTA space. The whole pension world has turned upside down since 2008,” says one manager quoted in the report. “Typically, these investors would have just put their money into an S&P tracker and left it there.”
CTAs gained attention again following last year’s market volatility, although performance among individual manages was been more varied than in 2008. Man Group’s AHL Diversified fund registered a -6.8% loss last year, while Monsoon Capital’s Asia-Pacific Systematic Program returned 18.16%.
Ironically, “the worst time to invest in CTAs is right after they made a lot of money”, one fund manager is quoted as saying in the report. “There is a long history of boom and bust cycles. Post-2008 people made the mistake of looking at CTAs like other parts of the portfolio that should work over time.”
Michiel Steenman, managing director of Geneva-based Steenman Asset Management, has previously noted that the ideal time period to be invested in a CTA is 10 years.
For some, however, CTAs are appealing for their highly liquid portfolio, which enables investors to redeem their capital with one month’s notice. This led some CTAs to be used as a cash-withdrawal machine during the financial crisis at a time when some hedge funds had gated their funds, effectively suspending investor redemptions.
“Demand for capital was so great that even top-performing liquid CTA/macro fund managers were subject to substantial withdrawals, as cash-strapped investors sought funds through any liquid portal," notes the Citi report. It quotes one manager as saying: “We were pretty much used as an ATM in 2008 because of our liberal liquidity.”
While cash-strapped investors made significant withdrawals among individual CTAs a few years ago, Citi notes that “money has been flowing more rapidly into these investments than at any previous time, and there are currently record allocations held in liquid CTA/macro strategies”.
The report acknowledges that although the increase in institutional allocations is changing the way the funds are managed – namely with less volatility and lower performance – it has helped CTA funds grow and move towards the mainstream. It foresees greater retail participation in the future through products such as Ucits structures and exchange-traded funds.