Recently released data on hedge fund flows confirm that investors are currently divesting from CTAs. As usual, outflows tend to track recent underperformance with a lag, which can be substantial at times. Between late August 2016 and late August 2017, CTAs experienced a 10 per cent drawdown according to the Lyxor CTA Broad Index.
Other measures of CTA performance paint a similar picture. Underperformance over the recent quarters has been caused by frequent trend reversals in the FX, commodity and fixed income spaces.
Jean-Baptiste Berthon (pictured), of Lyxor writes: “Investors have nonetheless started to divest near the trough, which took place early July. Since then, the strategy is up 2.2 per cent and is on track to outperform other hedge fund strategies this month. CTAs have recently benefitted from improving trend following conditions in the foreign exchange market (both DM and EM) and reshuffled their portfolios accordingly. Previous short positions on both the EUR and the CAD versus USD were fully reversed over the recent months. Long positions on both currencies are now contributing positively to performance. Meanwhile, CTAs added significantly to existing long positions on EMFX versus USD, which are paying off as EM assets continue to attract inflows in a low bond yield environment in the developed world.
“Yet, the trend following environment remains mixed overall. In particular, conditions remains poor in the fixed income and commodity segments and CTAs continue to rely heavily on trends in equity markets. Considering the fact that critical budget milestones in the US could further increase policy uncertainty in September, we believe that risk assets are vulnerable to some profit taking. As a result, we maintain the underweight stance on CTAs, with a preference for midterm models. But we acknowledge the fact that the strategy is now relying on firmer grounds. That could lead us to revise our stance in the coming weeks.
“In parallel, it is interesting to note that Global Macro, Fixed Income Arbitrage and L/S Equity strategies have experienced sizeable inflows over the last three months. The trend is consistent whether looking at flows into onshore of offshore alternative funds.”