CTAs: AI on the Rise but Humans Outperform

by Sandy Beharry

  • 11 Oct 2017
  • HF

The progression of artificial intelligence and the continuous evolution of technology have become leading factors affecting most industries, including the world of CTAs. As presented in the Preqin Special Report: Hedge Fund Manager Outlook, H2 2017, in a survey of 140 hedge fund managers from across the globe, 25% said they utilize a CTA methodology and 19% are planning to launch a CTA in H2 2017. Although CTAs tend to be thought of as computerized traders, with systematic CTAs dominating the industry, discretionary CTAs have recently been the better performers.

Preqin Hedge Fund Online currently tracks over 1,250 CTAs, the majority (83%) of which utilize a systematic trading methodology. From 2013 to 2016 systematic CTA launches gathered pace, with their share of total CTA launches rising from 80% to 90% in the period. As systematic CTAs become more prominent, discretionary CTA launches have correspondingly experienced a proportional decline, suggesting that AI incorporation and technological advancements are driving CTAs to increasingly use systematic methodologies over discretionary.

Although more systematic CTAs are being launched than discretionary CTAs, for the past 12 months discretionary CTAs have been outperforming systematic CTAs. According to Preqin’s  Hedge Fund Performance Update: July 2017, discretionary CTAs have posted a 12-month cumulative return of 3.16%, and systematic CTAs have a return of -4.09%; however, systematic CTAs saw an improvement in performance in August. Since the lows seen in January 2016, oil prices have shown improvement and discretionary CTAs have posted positive returns over this period,  generating gains with lower volatility in comparison to their systematic counterparts: discretionary CTAs have experienced a lower three- (4.01% vs. 6.07%) and five-year (3.44% vs. 5.43%) volatility than systematic CTAs.

Even though systematic CTAs have not performed as well as discretionary CTAs in recent times, this is largely due to a few steep negative months rather than something sustained consistently over the period. Systematic CTAs have a three-year cumulative return of 9.05% compared to discretionary CTAs with 2.64%. Over a five-year period, the cumulative returns are increasingly similar, with systematic CTAs showing a five-year cumulative return of 13.20%, and discretionary CTAs a return of 13.70%.

Investor Outlook
Nearly half of all hedge fund investors interviewed for the Preqin Investor Outlook: Alternative Assets, H2 2017 reported a negative perception of the hedge fund industry, with performance a leading concern for investors over the past few years. Over half of respondents expressed dissatisfaction with performance; 79% of systematic CTA investors stated that performance fell short of expectations, compared to 67% of discretionary CTA investors. Although discretionary funds are the smaller segment, more investors are planning to alter their asset allocations to increase their exposure to these vehicles than to systematic funds over the next 12 months: 14% of investors plan to increase their exposure to systematic CTAs in the next 12 months, with this figure rising to 20% for discretionary CTAs. This is perhaps due to the recent superior performance of discretionary CTAs over systematic CTAs.

Even with investors increasing their exposure to discretionary CTAs, we should continue to see a growth in computerized trading across the strategy, with technological advancements driving the industry forward.

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