Paper: How managed futures can help portfolios

Opalesque Exclusive: CTAs expected to recover from their YTD slump, Paper: How managed futures can help portfolios

By Benedicte Gravrand, Opalesque London:

2008 was great for Commodity Trading Advisers (CTAs), and showed that a good level of volatility can be positive (not forgetting Madoff’s funds which had no volatility). It was said at ‘The Battle of the Quants III’ conference in London on Friday that CTAs are a numbers’ game, a process of modelling the general effects, an adaptive model for contractions and expansion in markets. “Really, it is a hunting ground,” a participant added.

CTAs are not performing as well this year as the strategy, being directional trading-driven (where long or short positions try to predict movements in price of securities), is confronting a non-directional market. Although the Newedge CTA Index was positive in May with a return of 1.27% (-2.83% YTD) and the Credit Suisse/Tremont Managed Futures index returned -0.20% (est.) in May and -6.22% YTD (18.23% in 2008).

Finaltis: CTAs have evolved, performance is less cyclical
Opalesque learned yesterday that Denis Beaudoin, CEO of French fund manager Finaltis commented that following strong performance for CTAs in 2007 and 2008, with a reversal in 2009, there were good prospects that returns for the sector would turn positive once more:

“After their 2007 and 2008 rallies, CTAs have given back some of their gains so far in 2009. We believe that the strategy has given back enough and that the prospects for positive returns look attractive.

“It is true that CTA performance can be volatile and returns cyclical. Investing in CTAs after a long run-up has proved to be inefficient and investing after a drawdown has been profitable.”

Beaudoin argues that CTAs and multi-CTA programs have evolved: considerable progress has been made in adding diversification across assets and models, as well as risk controls so that performances are now less cyclical than in previous cycles and expected drawdowns are significantly reduced. The vast majority of CTA models have only shown modest drawdowns in 2009 and are ready to jump on the next trends, whatever direction those trends take. So longs as markets stay trending, there will be good opportunities for CTAs for the remainder of 2009 and into 2010.

John Locke Investments: CTAs following systemic approach are favoured
Francois Bonnin, CEO of French fund manager John Locke Investments, also reported yesterday that while CTAs had been affected by a lack of trends in world markets, the outlook is potentially more positive, especially for managers following a systematic approach using investment models.

“In 2008, the average CTA showed positive returns of around 13%. The MSCI World equity index lost 42% over the same period. Some funds did even better and our own showed a gain of over 28% in 2008. 2009 has been more difficult for CTAs because of the lack of clear trends in markets. However, there is evidence that new, interesting trends are set to appear. For example, uncertainties over the very high levels of debt in some countries and questions over whether investors will continue to finance these should create opportunities. Similarly, there is still much uncertainty over the impact of quantitative easing and whether economies are heading for inflation or deflation.”

Based on the premise that a trend is of a movement in a market that is outside normal performance, Bonnin believes it is the uncertainty that exists before trends develop that means interesting investment opportunities can arise. His investment models have been developed to identify and benefit from such moves on both a short and long term basis. A typical CTA investor should have an investment time horizon of at least three years. This permits them to access and benefit from both shorter term and longer term investment trends.

“Most CTAs implement systematic quantitative strategies, which are generally considered complex and non transparent,” he said. “Others, and we are one, offer transparency and daily liquidity. As risk appetite returns to world markets, CTAs with liquidity, and with returns uncorrelated to stocks are an ideal vehicle for investors who want the potential for positive returns without over exposure to volatile stock markets.”

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Related article: Paper: How managed futures can help portfolios
From Pionline.com: John Lintner, a Harvard professor, presented the seminal paper “The Potential Role of Managed Commodity Financial Futures Accounts in Portfolios of Stocks and Bonds” in May 1983. The findings of his work, namely that portfolios of equities and fixed income exhibit substantially less variance at every possible level of expected return when combined with managed futures, remain as true as ever today.

In this brief paper, we attempt to update Lintner's work by demonstrating that the beneficial correlative properties of managed futures presented in his research persist today. We also reintroduce managed futures as a diverse collection of liquid, transparent hedge fund strategies that tend to perform well in environments that are often difficult for traditional and other alternative investments.

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