Underwhelming performance in 2015 and high investor dissatisfaction have reduced inflows and demand for CTA funds, according to a report release by Preqin.
Having recorded returns of +10.85 per cent in 2014, their strongest performance since returning +15.70 per cent in 2010, CTAs saw further good performance in Q1 2015 as they posted returns of +4.29 per cent. However, negative returns in Q2 (-3.74 per cent) and Q3 (-0.16 per cent) saw volatile swings in CTA performance, and as of the end of October Preqin’s CTA benchmark has recorded YTD losses of -0.39 per cent. In contrast, all other hedge funds have posted YTD returns of +2.45 per cent as of the end of October, despite posting -3.94 per cent in Q3.
Funds of CTAs have posted even more pronounced swings in performance, returning -5.78 per cent in June 2015, and +3.39 per cent the following month. The Preqin benchmark for funds of CTAs is currently -6.18 per cent as of 31st October, having posted losses of 10.88 per cent in Q2.
A total of fifty CTAs launched in the first nine months of 2015, and the year looks set for the fewest launches since 2006, when 66 CTA funds launched. As a proportion of all hedge funds launched each year, the fraction represented by CTAs has fallen below 10 per cent for the first time since 2006, and now stands at 9 per cent.
As of the start of 2015, only 14 per cent of investors in CTAs planned to increase their exposure to these funds, despite good performance in 2014. Following poor Q2 performance, a June survey of CTA investors found that over 70 per cent were dissatisfied with returns.
Sixty-four per cent of CTAs use a trend-following strategy, the largest proportion. Two-thirds of CTAs trade currency futures, while 60 per cent trade stock indexes.
CTAs remain far more liquid than other hedge funds, with an average 11 day redemption notice period compared to 42 days for other products. CTAs also have a redemption frequency of 15 days, allowing investors to make commitments and withdrawals much more quickly than for other fund types.
Europe-based investors show the greatest appetite for investment in CTAs, with 27 per cent of investors in the region stating a preference for the strategy. Twenty-three percent of Asia-Pacific investors and 19 per cent of American institutional investors are interested in the fund type.
“CTAs exist as a true alternative to traditional products, offering an effective hedge against difficult economic environments and market downturns,” says Amy Bensted, head of hedge fund products at Preqin. “The poor performance of the sector in the years of the bull market has hit investor confidence in the asset class and it has become increasingly difficult for CTAs to raise capital.
“Even though the number of investors interested in CTAs continues to grow, investors have expressed prolonged dissatisfaction with the performance of the strategy. Managers of these strategies will have to adapt to meet growing investor demands, as well as proving their worth longer term to gain capital inflow.”