The Financial Times published an article on August 25 claiming CTAs are enduring a tough year.[1] We disagree:
1. On aggregate, CTA performance is captured by trend following on a diversified pool of futures instruments as demonstrated by regressing the SG CTA index.[2]
2. Yes, the SG CTA Index, the favoured benchmark in the industry, an equally weighted allocation to the 20 biggest CTAs[3] is indeed marginally worse than flat YTD in 2023.
3. But flat performance after a record year is more a case of return to normal than disaster. After an athlete breaks a world record, their next race might be not quite as good, but this wouldn’t be described as struggling.
4. Flat performance, such as that seen this year, is not uncommon for a modest Sharpe ratio strategy (about as modest as holding stocks [4]) and therefore there is nothing untoward going on… see the figure below.
And, finally,
5. At any one moment in time, some CTAs do better than the index and some do worse. The names referenced in the Financial Times article point to some of the worst performing funds in the universe. The performance of each fund, however, is distributed around the aggregate performance, and some are therefore doing better, including our own dedicated trend following program [5] while some are doing worse, notably those referenced in the article.
What should investors do with this dispersion around the aggregate performance? Well, in the same way a stock picker looks for persistent outperforming stocks, the job of the allocator is to pick those CTAs that outperform and will continue to outperform. [6]
As noted in our first edition of The Edge earlier in the year when we wrote about the Hedge Fund award curse – we are proud of the repeated success we have had in filling our trophy cabinet.
[1] ‘Hedge fund trend followers endure tough year after banner 2022’, Financial Times, August 25, 2023
[2] Please refer to our paper ‘Explaining hedge fund index returns’ available for download on the CFM website.
[3] Size in AUM of the CTAs amongst additional methodological criteria. For further details about the index, refer to the website of Société Générale Prime Services..
[4] Calculated using monthly returns, the SG CTA Index has a Sharpe ratio of 0.56 since its inception in January 2000. During the same period, the S&P 500 Total Return Index registered a Sharpe ratio of 0.51.
[5] Which is positive YTD.
[6] Being of course fully cognisant of the fact that past returns are not necessarily a good indicator of future performance.
Disclaimer
ANY DESCRIPTION OR INFORMATION INVOLVING MODELS, INVESTMENT PROCESSES OR ALLOCATIONS IS PROVIDED FOR ILLUSTRATIVE PURPOSES ONLY. ANY STATEMENTS REGARDING CORRELATIONS OR MODES OR OTHER SIMILAR BEHAVIORS CONSTITUTE ONLY SUBJECTIVE VIEWS, ARE BASED UPON REASONABLE EXPECTATIONS OR BELIEFS, AND SHOULD NOT BE RELIED ON. ALL STATEMENTS HEREIN ARE SUBJECT TO CHANGE DUE TO A VARIETY OF FACTORS INCLUDING FLUCTUATING MARKET CONDITIONS AND INVOLVE INHERENT RISKS AND UNCERTAINTIES BOTH GENERIC AND SPECIFIC, MANY OF WHICH CANNOT BE PREDICTED OR QUANTIFIED AND ARE BEYOND CFM’S CONTROL. FUTURE EVIDENCE AND ACTUAL RESULTS OR PERFORMANCE COULD DIFFER MATERIALLY FROM THE INFORMATION SET FORTH IN, CONTEMPLATED BY OR UNDERLYING THE STATEMENTS HEREIN.
