Systematic vs. Discretionary CTAs: Performance Overview of Two Trading Methodologies – April 2015

by Helen Brewster

  • 30 Apr 2015

After several years of lacklustre performance, CTAs saw their best annual net return in 2014 (+9.74%) since 2010 (+14.86%). As of March 2015, CTAs generated three months of consecutive gains, continuing their strong performance into the new year and most notably posting 3.44% in January 2015 for the benchmark. The Preqin All-Strategies Hedge Fund benchmark trails the Preqin All-CTA benchmark over the past 12 months by 8.34 percentage points (as of March 2015); CTAs have been buoyed by favourable weather conditions for commodities such as corn and wheat, fluctuations in the currency markets and strong trends in oil prices. In this blog we take a look at how CTAs employing systematic and discretionary methods have fared over the short and longer term, and what conditions have determined the marked difference in their performance track records over time.

Preqin’s Hedge Fund Analyst online service tracks 1,634 CTA vehicles worldwide. Systematic CTAs utilize computer models that are based on the use of algorithmic models that predict market trends. Meanwhile, discretionary strategies rely on the skill of a fund manager to make investment decisions by effectively exploiting chart patterns and supply/demand imbalances from data. As of March 2015, systematic CTAs have outperformed discretionary funds over the year so far, posting cumulative returns of 5.43% and 2.01% respectively, as shown in the chart below. The contrast in performance is more noticeable over the last 12 months, where systematic CTAs have generated an average return of 17.62%, while discretionary vehicles generated just 1.29% over the same period. However, it would appear that over the longer five-year period, discretionary CTAs have outperformed their systematic peers. 

In 2015 so far, nine CTA launches have been recorded; six of which employ a purely systematic approach, while the other three utilize both systematic and discretionary approaches. According to the Preqin Quarterly Update: Hedge Funds, Q1 2015, there have yet to be any CTA vehicles launched this year employing a solely discretionary trading style.

The success that systematic CTAs have experienced can be attributed to the high levels of volatility and reduced levels of correlation between global markets, thus increasing the amount of market trends they have been able to exploit. Systematic vehicles are also often seen as the less risky option over discretionary approaches, as they are not influenced by human emotion and therefore reduce the chance of any irrational investment decisions. It will be interesting to see how CTAs utilizing systematic and discretionary methods will perform over the longer term and whether this disparity might be a continued trend. 

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