{"id":82522,"date":"2019-09-24T23:53:31","date_gmt":"2019-09-24T21:53:31","guid":{"rendered":"http:\/\/beta.next-finance.net\/strategie\/good-luck-with-timing-ctas-favor-core-allocation\/"},"modified":"2020-01-02T22:14:11","modified_gmt":"2020-01-02T21:14:11","slug":"good-luck-with-timing-ctas-favor-core-allocation","status":"publish","type":"post","link":"http:\/\/beta.next-finance.net\/en\/strategie\/good-luck-with-timing-ctas-favor-core-allocation\/","title":{"rendered":"Good luck with timing CTAs – Favor core allocation"},"content":{"rendered":"

Timing CTAs is notoriously challenging. Monitoring their exposures provides a useful picture but has rarely been a
\nreliable allocation method. They enjoyed an impressive rally this year, mainly supported by their long bond
\npositions, which fueled high CTAs returns\u2019 auto-correlations. Returns might prove less trendy going forward. Over
\nthe last two weeks they gave back some of their gains, hit by a notable rotation in govies. They remain long bonds
\n(they shaved off their U.S. positions), moderately long dollar and equities, and they reinforced their long gold vs.
\nshort energy, base metals and soft futures. Their sensitivities to thematic baskets emphasizes that they are
\nimplicitly positioned for a gradual economic slowdown, persisting Chinese economic pressure, more monetary
\naccommodation (especially in the US), and no pick-up in inflation.<\/p>\n

Analyzing trend-following conditions has historically been a more effective approach. Large and broad reversals
\nare the main CTAs\u2019 enemies. To a lesser extent, periods of poor directionality are also adverse, leading to streams
\nof small unprofitable positions. As of today, trend-following conditions are contrasted in our view. On the bright
\nside, a number of ageing trends has just been reset, paving the way for better market directionality once the current
\nrotations have washed out. Witness the few assets still showing an over-stretched pulse. Also, cross-asset
\ndispersion normalized while we see only few cases of unstainable anomalies in cross-asset correlations. We
\nobserve similar patterns from a macro standpoint, with the recent convergence in our thematic baskets (tracking
\ngrowth, inflation, monetary policies implied pricing etc.) also pointing to a lesser risk of reversals going forward.<\/p>\n

Less positively, trend-following conditions appear increasingly driven by speculative rather than macro factors. The
\ntrade war truce earlier this year was followed by a brutal escalation, with hopes for a pause now building up again.
\nThese swings have been increasingly impactful for the global economy and monetary policies, and on markets.
\nRelying on trend-following conditions analysis when non-macro factors dictate volatility regimes can be treacherous.
\nWe remain of the view that allocators might be better off with a core allocation to the strategy, for at least four
\nreasons illustrated on the following page:<\/p>\n

First, CTAs prove to be the most profitable
\nin elevated and sustainably high volatility
\nphases, typically observed early and late in
\nthe cycle, and in particular during
\neconomic recessions. See their positive
\ncorrelation with volatility at these junctures.<\/p>\n

Second, they bring diversification in portfolios. They are negatively or very little
\ncorrelated to most other hedge fund
\nstrategies.<\/p>\n

Third, they provide access in a liquid way
\nto smaller market segments, in particular in
\nagricultural, metals, and assets of smaller
\ncountries that a majority of investors would
\nnot cover.<\/p>\n

Finally, CTAs optimize portfolio allocation
\nin the long-run. A core holding in basic
\nequity\/bond portfolios tend to reduce
\nvolatility while slightly improving returns.<\/p>\n

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