Trend-Following CTAs Suffer Performance Declines

Some quantitative investors are concerned that commodity trading advisers (CTAs) are “ill-equipped to handle a new era of steeper declines and sudden volatility spikes,” according to a recent article in Bloomberg.

In February, the article asserts, the trend-following strategy employed by CTAs suffered the worst month since 2001 (according to a Societe General basket of the 20 largest managers), and in the beginning of March these funds fell by 0.7 percent.

The article offers the opinion of Quest Partner’s Nigol Koulajian, who explains that “CTAs are less able to hedge equity corrections because they’ve gone more long term. This is a byproduct of the market environment not being difficult enough, making the strategies lazier.”

Koulajian points out that, over the past few years, slow-moving (less reactive) CTAs have done better than “quick” ones. “You’re trading a lot and getting whipsawed,” he says, “whereas a slow-moving approach might just ride through a choppy period.”

But preparing for volatility can be problematic, the article points out, quoting Paris-based quant firm Capital Fund Management SA president Philippe Jordan: “CTA managers who make assumptions about oncoming shifts as they prep for choppier markets risk creating less-robust portfolios that may not capture the broader trend.”

According to Koulajian, those funds that have grown “based on their success chasing equity momentum are now too large to change pace,” adding that becoming more reactive would translate into higher trading costs. This situation leaves most CTAs, the article concludes, without downside protection, “paying up for the exposure they could get through any long-equity position.”