Top 10 questions investors want to know about CTAs
What are the top ten questions investors want to know about CTAs? Individual and institutional investors are increasingly considering CTA strategies as part of a diversified investment portfolio in the search for alternative or non-traditional investment opportunities and uncorrelated returns. The following are some frequently asked questions about CTAs.
1. What are CTA strategies?
They are a diverse subset of active hedge fund strategies that largely focus on financial futures markets — equity indices, fixed income, and foreign exchange — with additional allocations to energy, metals, and agricultural markets. There are also Commodity Specialist Managers that focus mainly or exclusively on commodity markets.
2. Have CTA strategies changed since they became popular in the 1970s?
The predominant strategy remains trend following, but this approach has evolved significantly in sophistication in recent years, and the overall space has become increasingly diverse. The number and variety of short-term programs has risen sharply with the advances in trading technology, data analysis, and increased interest from quantitative traders in establishing their own trading firms.
3. Why should I include CTA strategies in my portfolio?
CTA strategies can be a source of uncorrelated alpha because they are directionally unbiased, often cover a variety of time frames in their position holding periods, and have historically sought returns independently of the prevailing economic or volatility regime.
4. What is the general approach CTAs take to risk management?
The risk management style of trend followers tends to create a positive convexity return profile, similar to what can be achieved using options. They generally seek to preserve upside potential and limit downside risk to predetermined levels through the use of stop-loss orders and other means.
5. How do maximum drawdowns of CTAs compare to those of other hedge fund strategies?
Historically, drawdowns in many CTA strategies have been significantly smaller than in most other hedge fund strategies.
6. Do CTAs employ leverage in their trading?
CTAs do not employ leverage in the traditional sense of borrowing money to increase exposure. Funds that are not being used as margin can be invested in treasury securities or various liquid instruments that meet the requirements of the customer’s FCMs.
7. Do CTAs generally offer position and strategy transparency?
Transparency at the manager level depends on the policy of the manager and the structure employed, whether a managed account or a fund. With individual managed accounts, full transparency and control of funds is available.
8. Are the products that CTAs trade liquid?
CTAs generally utilize the most liquid exchange-traded products with the highest level of open interest, which enables them to offer investors excellent liquidity terms.
9. Do CTAs impose gates and lockups?
CTAs generally have liberal redemption policies, usually monthly or quarterly with no restrictions, if not better. Some CTAs offer daily liquidity. Unlike what took place in some other hedge fund strategies, CTAs generally did not impose either gates or lockups during the financial crisis of 2008 – 2009. With separately managed accounts, investors can terminate a trading manager’s power of attorney and liquidate positions themselves. CTAs cannot restrict customers from making withdrawals from their managed accounts.
10. Is there research that supports the inclusion of Managed Futures in portfolios?
There is a substantial body of research and numerous recent articles, that demonstrate the portfolio benefits managed futures can offer.
To find out more about CTAs read:
> Top 5 reasons to incorporate CTAs into your portfolio
> 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
Or download the CTA World Congress & Quant Invest 2012 brochure to find out how to incorporate them successfully into your portfolio.