CTAs - How Managed Futures Manage the Future

Abstract

In recent years, the CTA industry has experienced significant growth in assets under management. This impressive growth has two main drivers: first, renowned CTA benchmarks show that CTA strategies can generate an attractive, risk-adjusted return in the long term; and second, CTAs have proven to be highly attractive thanks to their outstanding diversification characteristics. This paper examines these characteristics and provides possible foundations thereof. It is shown that their low and asymmetric correlations to traditional asset classes - and also particularly in relative comparison to other hedge fund strategies - make them suitable for diversifying a broad range of portfolios. The key to the success of CTAs lies in their broad investment universe and their ability to symmetrically take long and short positions in liquid futures markets. While the long side of a CTA strives to profit continually from long-term positive risk premiums, the short side acts more as a type of insurance than a source of systematic returns. As a consequence, CTAs have the potential to generate positive returns during extreme market movements, and thus provide substantial diversification benefits to an investor's portfolio.