Summary
Timing CTAs is notoriously challenging. We review the pros and cons of several allocation methods to CTAs.
CTAs exposures analysis provide valuable risk metrics, but have rarely been an efficient allocation decision tool
Tracking CTAs’ exposures to figure out whether they match one’s fundamental view and/or how they fit in one’s diversified allocation may provide a useful instant map of risks. However, using CTAs exposures as an allocation decision tool has rarely been a reliable method – unless full position transparency is available on an on-going basis.
Little evidence that tactical allocations to CTAs add much value
Applying a tactical approach on CTAs is tempting, following a momentum or contrarian style. Nevertheless, we find little evidence that taking profits after CTAs’ strong runs or, conversely, buying into CTAs’ performance momentum sustainably adds much value.
Analysing trend-following conditions appears more effective
CTAs tend to do well when asset trends are at a reasonably early stage, with reasonably low cross trend correlations and exploitable volatility (i.e., neither too low nor extreme). In contrast, they suffer during episodes of market reversals. To some extent, periods of limited trendiness also hurt their performance, as they endure multiple false starts and higher transaction costs.
Maintaining a core position on CTAs might not be a bad choice after all
Investors might be better off with a core allocation to CTAs, for at least five reasons.
First, CTAs tend to provide downside protection as they are positively correlated with volatility,
Second, they bring diversification in portfolios,
Third, they provide access in a liquid way to smaller market segments,
Fourth, CTAs benefit from high cash rates,
Finally, CTAs optimize portfolio allocation over the long-run.
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