Australian consultancy Zenith Investment Partners has just released its 2013 CTA / Macro Sector findings. Daniel Liptak, Head of Alternatives said: "With the performance of many CTAs struggling over the last 18 - 24 months we believe that it is timely to consider the function and utility such funds can make to a portfolio."
Zenith's believes that CTAs are an important strategy that should be considered as part of a diversified portfolio, particularly as over the medium term CTAs have historically provided an offset at times of acute equity market stress. "This observation is the likely cause of many investors believing that CTAs are long volatility, when in fact they are long gamma (they become more exposed to a trend as it becomes more pronounced, regardless of direction). Being long gamma allows this investment style to take advantages of being a liquidity provider in markets undergoing forced sales. Investors in CTAs need to understand that not all market conditions are conducive to positive returns and, indeed on a standalone basis CTAs can disappoint" Zenith says.
While Zenith believes that medium term CTAs can act as an offset in dislocated equity markets, they are hesitant to class CTAs as being un-correlated to equity markets, believing that they are on the whole non-correlated to equities. "This is an important observation, as this suggests that the returns from CTAs are independent of equity markets but are not a pure equity market hedge and should not be used solely for that purpose in a portfolio" the firm notes.
CTAs are offered with a variety of targeted or realized risk levels. "Investors should note that a fund with a volatility target of 8% and another with 16% should be allocated on a risk weighted basis. This means that if an allocator is looking at investing to only one fund and is capital constrained a smaller allocation to the higher volatility CTA, in general, will provide the same outcome to a portfolio as an allocation of twice the size to the lower risk CTA. This frees up scarce capital to be placed in other opportunities. It also may reduce the fee drag on the whole portfolio."
Despite the fact that on a standalone basis CTAs can disappoint, the firm finds that typically they display positive skew. "The upside capture when a CTA programme captures a trend significantly outweighs the small losses while waiting for a trend to follow. In a portfolio context this characteristic significantly de-risks traditional assets."
Turning to the issue of fees, Zenith feels that the systematic approach to risk management and portfolio construction coupled with ongoing research provides a strong rationale for the fees charged. Even after fees, good CTAs often display protection from market volatility wrapped up with positive carry over three to five years.
Zenith believes CTA allocation should be part of the alternative allocation funded by proportionally reducing allocations to fixed income and equities.
From their own data with an initial universe of 64 CTA / Macro funds, six CTA/Macro funds were rated "Highly Recommended", 10 were rated "Recommended", three funds were rated "Approved" and 45 were "Not Approved".
Receiving Zenith's top rating accolade were the BlackRock Scientific Global Markets Fund, GMO Systematic Global Macro Trust - Class B, Man GLG Global Macro (AUD), Aspect Diversified Futures Fund - Class A, Man AHL Alpha (AUD) and the H3 Commodities Fund.
New ratings included a Recommended rating on a new Sydney based Macro fund MST Global Fund and an Approved rating on resource specialist Taurus Enhanced Gold and Precious Metals Fund.
Opalesque's Asia Pacific Intelligence interviewed Daniel Liptak in December. You can read that piece here.
(This piece first appeared in Opalesque's AMB in April.)
This article was published in Opalesque's Asia Pacific Intelligence our monthly research update on alternative investments in the Asia-Pacific region.