When considering the ever-changing demands of investors, the need for protection against market downturns is unwavering. CTAs are regarded as having the capability to make significant gains in extended market declines and an implicit long volatility facet. Historically, investors seeking risk-mitigation strategies have turned to CTAs – a trend that prevails in today’s market environment. As surveyed in Preqin’s Investor Update: Alternative Assets, H2 2018, 28% of investors plan to increase their allocations to systematic CTAs specifically over the next 12 months, improving the fundraising environment in which CTAs have prospered in recent years.
For two consecutive years, CTAs have recorded the greatest net asset flows among top-level hedge fund strategies. CTAs were the only fund type to generate positive net flows at $25.5bn in 2016, and in 2017 achieved a similar inflow level of $25.2bn. The hedge fund industry overall was left with a deficit of $110bn and a surplus of $44bn over the respective periods. In Q1 2018, inflows of $13bn were recorded followed by outflows of $9.2bn in the second quarter.
Since 2012, the number of active systematic CTAs tracked by Preqin has risen by nearly 18% to 774, only recently seeing its first decline as liquidations outnumber launches in 2018 year-to-date. Leading up to the decline, the industry faced its highest number (69) of liquidations in 2016, and in the following year the number of launches was more than half the number (100) of CTAs launched in 2012. Of the launches in 2017, nearly four in every five were by established CTA managers including Aspect Capital, Man Group and Systematica Investments. In conjunction with the decreasing launch activity, it would appear established CTA managers are gaining more from the increased investor appetite than its emerging counterparts.
The February 2018 downturn led to much discussion about how CTAs model objectives and calibrate towards the market with algorithms that can find and execute trades across several securities. Precipitated by rising treasury yields and higher inflation, that month marked record losses for systematic CTAs (-5.62%), forcing many to deleverage. This is in stark contrast to the 4.00% gains in the previous month. The Preqin All-Strategies Hedge Fund benchmark took less of a hit in February with a return of -0.94%.
Investors, however, remain steadfast: despite the downturn they continue to seek access to the low correlation and outperformance that CTAs have historically provided. Despite the varied industry performance at the beginning of 2018, investors seem committed to CTAs: 56% of those interviewed in June 2018 believe the equity cycle is reaching its peak. With CTAs’ position as a sophisticated diversifier in their current hedge fund allocations, we can expect investor appetite to persist.