A new report from RCM Alternatives highlights the struggles of Commodity Trading Advisors (CTAs) in 2018.
The report, Managed Futures/Global Macro 2018 Strategy Review, notes that last year was generally a disappointing one for managed futures and global macro across most strategy groups.
This is perhaps surprising, given that there were significant sell-offs in the equities markets in 2018, which is when the diversification benefits of having CTAs in the portfolio is supposed to be felt.
As the report explains: “With equities getting hit hard, this was a prime opportunity for CTAs, managed futures and macro to come off the mat and show investors the power of diversification. Instead, the lesson was that sometimes non-correlation does not equal negative correlation, especially in the short term.”
The report says that trend followers struggled last year after being whipsawed in February and October because they were in line with the dominant trend of equities up, while short-term momentum traders where whipsawed by those same V-shaped reversals and then again by V-shaped recoveries. Agriculture traders, according to the report, “by and large sat on their hands watching another bumper crop come and go”, while volatility trading was a zero-sum game, “with some notable winners alongside some remarkable flameouts”.
Only multi-strategy fund managers appeared to perform well – but not outstandingly – in 2018, says RCM Alternatives in the report. These managers look to blend ideas from the systematic trading world, such as trend, short-term, momentum, mean reversion, into a single trading strategy that performs in a variety of markets and market conditions. But even then, the report claims that the trend following components of these strategies appears to have been a drag on performance, capping potential gains from the other strategy types.
The says that investors probably expected more out of the supposed diversifiers within their portfolios, especially with nearly every other asset class being down on the year, pointing out that the non-correlation to other asset classes touted by CTAs still means that their performance can actually go either up and down when stock prices are sliding.
“Investors don’t have to like that, and indeed we’re seeing more and more investors desire tactical negative correlation (a program that delivers when there is a sell off) in place of non-correlation (programs which might deliver in a sell off) – so they’re not left with that unfulfilled feeling,” says RCM Alternatives in the report.
However, the report does end on a more optimistic note, claiming that when investors are ready to throw in the towel on trend following or sophisticated multi-strategies is typically exactly when these strategies start to perform.