CTAs: With or Without Trend Following in Equities?
Evaluating the equity risk exposure within managed futures
June 2024. Reading Time: 10 Minutes. Author: Nicolas Rabener.
SUMMARY
- CTAs benefitted significantly from pursuing trend following in equities
- Excluding equities from a managed futures strategy would have decreased the return
- However, CTAs without equities would still have generated attractive diversification benefits
INTRODUCTION
There often is a large discrepancy between what investors are talking about and what they are allocating to. Take managed futures as an example, these have become more popular in financial blogs and threads on X as they generated attractive diversification benefits in 2022 when stocks and bonds declined.
However, the assets under management in the managed futures industry are $336 billion as of the end of 2023, almost the same as the $359 billion in 2013 with hardly any meaningful in or outflows over the last decade, as per BarclayHedge (read Managed Futures: The Empire Strikes Back).
Although managed futures, which are also called CTAs, have demonstrated their utility for asset allocation in recent years, the manager returns are quite dispersed. There are differences in how trends are measured and exploited, how trades are implemented, and what the universe of tradeable instruments comprises.
One key debate is whether equities should be included as a tradable asset class as most investors already have equity exposure in their portfolios. CTAs can naturally short equities, but shorting equities is difficult as stock market crashes are often short and swift, which makes them difficult to exploit with trend following models (read Trend Following in Bear Markets).
In this article, we will contrast CTAs with and without an equities allocation.
FACTOR EXPOSURE ANALYSIS
The SG CTA Index is the benchmark index for the managed futures industry. We can replicate this index from scratch by exploiting trends over numerous asset classes (read
