CTAs – “how many consultants does it take to change a light bulb?” #CTAEU
The opening address was kicked off with an amusing analogy from Matthew Roberts, Head of Multi Strategy Hedge Fund Manager Research, Towers Watson.
He described how last Saturday he was lying in bed when one of his light bulbs went out. From that point he did everything one is not supposed to do when changing a light bulb. He stood precariously on a chair, used an old style bulb, not an energy inefficient light bulb, he took the bulb out when it was still hot and burnt his hand significantly, so much so that he fell off the chair onto the bed and bumped his head.
Roberts makes the point that he was naïve, inexperienced and he got his hands burnt. He underlines that regarding allocation to CTAs, he hopes that their experience in CTAs will ensure that this doesn’t happen.
What makes a good manager?
- Very different to a typical stock picker or value based manager
- It’s systems infrastructure, models etc are very important
What are the risks?
- Some managers are totally open but some will tell you nothing
- There seems to be quite a big improvement in this area in the industry
- There seems to have been some progress. As long as it was a fair share of the manager’s alpha generation 2 and 20 is acceptable
Leverage and over crowed trades continue to be a big risk
What could we do to help us overcome those risks?
- Understanding industry capacity – so the size of the CTA universe
- Volatility management – understanding the tolerance of our clients is very important; the volatility target at which you invest in CTAs, you can tailor it depending on what you want. 20% or higher we consider to not be tolerable to our clients.
- Paying for alpha – on the fee point, it’s not the optics that are important it’s the percentage of alpha that the managers are going to generate in relation to the fees
- Relationships and lots of meetings – building the right level of understanding over time.
What are you doing to overcome the risks inherent with CTA investments? Are you doing something different?
Let us know your thoughts below…
Other articles to come out of the CTA World Congress Europe conference include:
> What is the common thread that bonds the CTA industry together?
> Why do CTAs, often called the black box of the investment industry, attract investors?
> 6 things investors consider when considering CTAs as part of their investment portfolio?
> The key reasons investors adopt a systematic approach