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Laxman Pai, Opalesque Asia:

CTAs were tested under market stress in 2020, and were found wanting by some investors, said Preqin.

"The relationship between market stress and volatility is a complicated one. CTAs are generally included in portfolios because of their low correlation to traditional asset classes such as stocks, bonds, and real estate, and because of their historical ability to provide crisis alpha under market stress," said the report.

Without sizable market moves during a period of uncertainty, volatility may be high, but markets may not show signs of stress.

In prior years, this lack of sustained market stress has been an issue for many reactive/price-driven CTA managers. But that pattern changed in 2020, with CTAs returning +1.11% in the first quarter and finishing the year up 7.21%.

The performance of discretionary and systematic CTAs have diverged over the past few years, and their three-year correlation remains quite low (+0.22).

Discretionary managers in aggregate were down 1.94% in 2018, and up 1.82% in 2019. Systematics, on the other hand, was down 3.65% in 2018, and up 6.81% in 2019.

Under market stress in 2020, discretionary managers performed better, generating a +10.35% return in aggregate compared to systematics' +7.54%.

Systematic CTAs follow rule-based models, while discretionary managers have the flexibility to adapt, Preqin said.

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