Alternative Market Briefing

Best year ever for this multi-CTA fund

Wednesday, February 01, 2023

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Per Ivarsson B. G., Opalesque Geneva:

While global stocks experienced their worst year last year since 2008 and the fourth worst year on record (as measured by the MSCI World TR Index), CTAs had their best year since '08, generating significant crisis alpha. The SG CTA Index, which tracks the 20 largest managed futures* hedge funds, was up 18%, its best year since its inception in 2000.

The RPM Evolving CTA Fund, a multi-CTA fund with a core trend following strategy, returned 23% in 2022. This was also its best year since its 2013 inception.

"Damned if you do and damned if you do not! Emotionally, it is not easy being a CTA specialist investor," writes Mikael Stenbom, founder and CEO of RPM in his yearly performance review. "More than half of the time you must explain why trend following is not dead. Then, when managed futures finally generate uber-performance you cannot be too cheerful either as everybody else typically feels miserable."

The Fund is run by RPM Risk & Portfolio Management AB which has about $1.4bn under management and advisory. It was established in 1993 in Stockholm, Sweden.

Per Ivarsson, the CIO of RPM, will present in Opalesque's next webinar, Is there still ALPHA in HEDGE FUNDS? on February 9th (details below).

A good year for CTAS

Managed futures profit from both large upswings and slowdowns in economic activity. During financial market crises, CTAs tend to outperform other investment styles as they deliver 'crisis alpha' **. However, periods around business cycle turning points are typically less attractive from a return perspective.

As the post-pandemic recovery had run out of steam by mid-2021, CTA performance picked up during the subsequent slowdown, where global stock and bond markets entered crisis mode. Many CTAs, and CTA indices, ended up generating their best performance since the Great Financial Crisis of 2008.

Outlook: less exalted than in 2022

"This year, we expect that the global economic slowdown will continue, although less dramatically than in 2022, with the US entering a 'mild' recession," says RPM's yearly performance review. "However, as inflation is expected to remain an issue for most of 2023, interest rates are likely to remain high which poses a major downside risk to the soft landing scenario with regards to leverage and liquidity."

Regarding CTA performance, the outlook remains positive although less exalted than last year, the review continues.

In the long run, the two main arguments for a favourable financial trading environment remain intact (climate change and de-globalisation).

In the short run, current themes, i.e., the fight against inflation, the war in Ukraine and other geopolitical tensions, and even Covid (after China's abandoning of its zero-Covid policy), will continue to drive markets and create trends, although probably less dramatic than last year. Furthermore, interest rates are now at levels last seen 15 years ago, which should provide some tailwind for CTAs. But if financial markets were to see an escalation of the crises, 2023 could be a repeat for CTA performance.

Performance and strategy

The RPM Evolving CTA Fund is an award-winning diversified multi-CTA fund domiciled in Luxembourg as a SICAV / AIF. Launched in June 2013, the Fund's Euro share returned 23% net in 2022 and annualised 3.2% since inception, compared to 2.5% for the Barclay BTOP50 (Eur). Meanwhile, the Barclay CTA Index was up 7% in 2022, and the Preqin CTA (Eur) index was up 5%.

The Fund mainly profited from bearish trends in fixed income. Performance was largely positive across managers and sub-strategies, but overall, faster systems outperformed especially during the more volatile, rather directionless, second half of the year.

Through a systematic investment process, RPM identifies CTAs (Commodity Trading Advisors) that are in their so-called "Evolving Phase". Historically, this has proven to be the most promising period for CTA managers from a risk/return perspective. Typically, CTAs in the Evolving Phase have two to seven years of track record with US$20m to US$1bn in AuM.

The Fund allocates to four different CTA sub-strategies through 10 to 15 managers: Trend Following serves as the core allocation. Short-term Trading, Commodity, and Fundamental CTAs are diversifying and balancing components.

Trend following generates profits when prices move substantially and sustainably in many different markets at the same time. In 2022, many financial markets entered crisis mode, most notably stocks and bonds. A major part of CTA returns stemmed from being short bonds.

* Managed futures, commonly associated with CTAs, is a subclass of alternative investment strategies which take positions and trade primarily in futures market.
** Crisis alpha is a relatively new term used to describe investment strategies designed to generate positive returns during equity market panics (see In search of crisis alpha report).

WEBINAR

Is there still ALPHA in HEDGE FUNDS?

Join our interactive webinar with Marc Malek, founder and CIO of Conquest Capital Partners, and Per Ivarsson, CIO of RPM Risk & Portfolio Management, who will discuss these topics and more:

• How to define and quantify "alpha" and how it is different from "alternative beta"
• Specific examples of hedge fund strategies and managers that do (and do not) generate alpha
• Today's opportunities, including techniques funds can employ to generate alpha in any market environment

When: Thursday, February 9th, at 11am ET

Free registration here: www.opalesque.com/webinar/