I was talking to a new CTA with a run of the mill trend following strategy (live track record of 14% annualized over past 7 years, on 40+ markets) and he said he doesn't see any capacity constraints for such program until he hits billions in AUM. I don't think so . For starters as far as I know few CTA's run billions of dollars, and their performance has been rather mediocre over the past 10 years, especially if we remove 2008-2009 and I read CTA's tend to disappoint as they grow in size, which in general seems to be true in my experience . So is it professional for him to say no capacity constraints ?
Absolutely Unprofessional for him say no constraints and is misleading. The more money you have to move around the harder it is to "park it" without the counterparties noticing what your intentions are and trying to exploit it in their favor.
There are numerous CTA programs which run into the billions. The NewEdge CTA index has 20 programs, currently open to the public and willing to participate, with a minimum AUM of $900 mm. There are also many others up to the tens of billions in size. You didn't tell us much about the program, but a 14% cagr doesn't seem spectacular or remotely unlikely. There's no reason to think they can't match those numbers in size. As far as capacity.... commodity markets, especially when you include equity indices and interest rate trades, are extrreeeeeeemely liquid and deep. It depends on the strategy they're trading. If they are under 1000 RT a million a year, then yea absolutely billions in AUM wouldn't be improbable.
tens of billions ? Which ones ? What I am saying is if a CTA makes 14% a year with less than 100 millions, and they start gettting very big, 1 or 2 bln, isn't it reasonable to expect lower returns ?
Just off the top of my head, Winton has $20 bil+, BlueTrend has $10 bil+. Man AHL probably has $30 billion. Clearly capacity eventually becomes an issue. The exact point depends on strategy. For a trend follower, no way is 1 bil or 2 bil "very big".
Also must consider the relationship of the CTA with the FCM. If it is a small time CTA trading through Interactive Brokers he is pretty much at the mercy of the electronic trading platform for trade execution. If the CTA has >$100MM he is probably with a top tier FCM like Goldman, Newedge, JP Morgan, MF Global, etc... These FCMs will provide assistance with trade execution to larger customers. This will help with problems relating to split fills and block trades. Makes it much easier for them to trade their program with larger AUM.
I don't know how important it is that you have a good FCM execution desks... there are a lot of independent execution brokerage firms out there that will execute trades for you and just charge a give-up. You can even get that with IB, as long as you have around $10mm AUM.
But alot of those big fund managers have those billions spread across numerous different fund entities. Alot of the better performers are definitely smaller in size, but within reason. In the sub-500 million dollar AUM scope.
No, not true. What I referenced above are all single strategies... it doesn't matter how many different accounts they're spread across (and I'm sure many traded managed accounts)... since by NFA rules, all these strategies must be traded similarly with the same performance. Winton Capital claims to have $22 billion in one strategy: http://www.iasg.com/groups/group/winton-capital-management/program/diversified MAN AHL Diversified might actually be a single fund entity, actually... not sure if they run managed accounts. $20 billion+. BlueTrend is a single strategy/product from BlueCrest capital, and has around $10 billion in AUM.
I stand corrected. Winton's numbers are good as well, especially in light of their size. I agree with the original premise of this thread "in general". i.e. funds that grow in size at some point transition into "asset gatherers" and the returns suffer. It's a notable achievement the small group of funds that don't fall prey to that.