Data taken from the November issue of Preqin Hedge Fund Spotlight shows that institutional investor appetite for Commodity Trading Advisors has more than doubled since 2008. In 2008, Preqin Hedge Fund Investor profiles tracked 331 institutional investors with an active CTA portfolio; there are now 713 global institutional investors with CTAs in their holdings. What has caused the sudden increase in investor appetite?
Preqin Hedge Fund Analyst contains detailed information on 429 CTA managers, which combined manage 1,298 CTA vehicles. The CTA industry saw a significant increase in the number of new vehicles launched in 2004, following two years of strong performance by the CTA sector, when CTA funds posted average returns of 22.37% and 27.19% in 2002 and 2003 respectively. There was another spike in CTA launches in 2009 following the very strong performance of managed futures programs in 2008 (posting benchmark returns of 19.11% versus negative 17.01% for the hedge fund index). The value of CTA programs in an institutional portfolio was emphasized to investors following the events of 2008, and the number of CTA funds in the industry, as well as the number of investors allocating to these CTA vehicles, has been increasing since that time.
CTAs have returned 2.00% in 2012 to date and 0.35% over the past 12 months, compared to the wider hedge fund industry that has seen 2012 to date returns of 6.32% and 12 month returns of 8.02%. In the short term, CTAs have underperformed in relation to the wider hedge fund industry, but when looking over the longer term, horizon CTAs show improved performance figures. Over a five-year annualized period, CTAs have returned 8.98%, outperforming the wider hedge fund industry, which returned 6.35% during this period. CTAs not only have greater returns than the hedge fund industry over a longer time frame, but they also exhibit negative correlation to equity markets which, during times of economic uncertainty, means they can act as a portfolio diversifier for a predominantly equity focused portfolio.
CTAs are widely viewed as an “all-weather” investment choice for investors given their ability to produce uncorrelated returns and offer diversification within an institutional portfolio. Investors have flocked to these funds following the strong performance figures they posted through the financial crisis. However, returns have been relatively flat since this time and there has been the beginning of some dissatisfaction among institutional investors over the past few months. Institutional investors cited CTAs as the second most disappointing fund strategy in terms of returns (behind long/short equity) over the past year. The ability of CTAs to provide “crisis alpha” as well as liquidity in financial downturns has largely accounted for the rise in investor interest in the strategy among hedge fund investors. However, if performance continues to disappoint two questions remain: how much patience will investors have with the strategy, and will other hedge fund investment opportunities prove a more attractive value proposition in the near future?