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Citibank Prime Finance Research Report Spotlights "Sharply Accelerated" Interest in CTA Strategies
By Scott Helfman

Investors' attention to Commodity Trading Advisors (CTAs) and to currency focused Macro hedge funds accelerated in recent years, particularly after the 2008 Financial Crisis, increasing market share to 14% of combined industry AUM at the end of 2011, up from 10% in 2007 according to a survey released today by Citi (NYSE: C) Prime Finance at the Managed Funds Association's Annual Conference, Forum 2012 in Chicago. The report, "Moving into the Mainstream: Liquid CTA/Macro Strategies and Their Role in Providing Portfolio Diversification," outlines key factors that make liquid CTA/Macro managers attractive to investors relative to long-only and hedge fund strategies and provide a ready source of liquidity in times of market stress.

From their original position atop the retail and high net worth investor's "risk pyramid," the Liquid CTA/Macro industry has broadened out and become a core portfolio component for institutional investors in recent years - from public and corporate pensions to endowments and foundations to family offices.

The research indicates that positive, uncorrelated performance during the 2008 Global Financial Crisis helped accelerate this expansion in the industry's investor base. Yet, the industry itself also changed to accommodate this new institutional target market. To absorb the extensive asset flows originating from institutions, the industry sought means to extend its capacity and reduce portfolio volatility.

"A significant shift in investment approach has taken place since the 2008 Global Financial Crisis and investors, particularly institutional investors, have been actively looking to diversify their portfolios to better weather periods of unusual market stress," said Jerome Kemp, Global Head of Futures and OTC Clearing.

As the investor audience base has grown, the distribution model too has evolved. Whereas money was primarily raised for these managers by wire house financial advisors via managed futures product in the early years of the industry, managers now list their funds on institutionally focused capital raising platforms and further develop their own hedge fund-like marketing teams to directly raise assets.

The survey also finds that there has been a decisive shift within the Liquid CTA/Macro manager landscape toward systematic as opposed to discretionary trading. Whereas AUM was fairly evenly split between these two approaches in 2000 (55% systematic and 45% discretionary), according to Barclay Hedge that ratio changed dramatically to 83% systematic and 17% discretionary by the end of 2011.

"These trends are not only driving the industry to be more systematic, but they are also changing the nature of the systems being deployed by participants and allowing for increasingly dynamic and innovative trading models," continued Sandy Kaul, US Head of Business Advisory for Citi Prime Finance.

According to the research, there has been a significant expansion in the number of models being used to evaluate opportunities, a dramatic shortening of the time frame under consideration, and broad growth in the number of markets being tracked resulting in distinct "generations" of systematic approaches:

• Generation One - primarily a long-term trend-following system focused on the traditional commodity markets
• Generation Two - a set of models with broader measures such as mean reversion, momentum, volatility, and others focused on a more expansive set of financial and currency contracts
• Generation Three - further set of expanded models that layer multiple sets of models on top of the same market and allow prices and positions to be translated across markets and into alternative measures

This paper is the result of a series of qualitative interviews conducted with an audience of CTAs and hedge fund managers focused on highly liquid macro strategies, as well as investors and other participants involved with allocating to these strategies. In total, the participants represented AUM of $86.5 billion USD, just over 25% of the industry's total allocations.

The full report can be viewed at: http://icg.citi.com/icg/global_markets/prime_finance/business_advisory.jsp

Citi, the leading global bank, has approximately 200 million customer accounts and does business in more than 160 countries and jurisdictions. Citi provides consumers, corporations, governments and institutions with a broad range of financial products and services, including consumer banking and credit, corporate and investment banking, securities brokerage, transaction services, and wealth management.