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Bailey McCann, Opalesque New York:

CTAs have taken a beating performance wise lately, and asset flows reports show that investors aren't sticking around to see how the movie ends. Now, a new white paper from Roy Niederhoffer and Coen Weddepohl notes that as interest rates start to tick back up, trend followers and others could see a new performance problem given sizable positions in fixed income. Opalesque previously reported on a similar idea put out in a separate paper by Quest Partners last year. Many of the biggest CTAs have relied on fixed income in recent years, although the exposure limits the ability of CTAs to be a truly uncorrelated hedge.

In the Niederhoffer paper, authors explain the preference for fixed income by noting that "fixed income markets offered a combination of high liquidity, a long uptrend from the secular decline in rates and, importantly, a general state of backwardation which earned investors in fixed income futures an average roll yield of about +3% per year."

"We show that if rates were to increase in a path inverse to their multi-decade decline, CTAs will struggle to make money due to a lack of clear price trends in fixed income futures and the negative carry from being short fixed income futures. This problem will become worse if the yield curve steepens."

For the biggest CTAs going into commodities mark......................

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