A number of commodity experts including Man Group and EDHEC have highlighted why long/short commodity strategies are increasingly attractive to investors seeking low correlation to equities and bonds and strong performance.
The industry created by these money managers or commodity trading advisors (CTAs) is called managed futures.
Managed futures has experienced a rapid rise in popularity in the last 12 months with investors allocating nearly $25bn to it since the end of 2010.
According to Barclay Hedge, by the end of the second quarter of 2011 total assets in managed futures were on the cusp of hitting the $300bn mark.
In an interview with InvestmentEurope, Man Group’s head of Multi-Managers Ellis agreed with Miffre that CTAs provide diversification, driving investors towards the managed futures strategy.
Ellis says the strength of CTAs is the fact they can run full risk all the time which proved to be extremely beneficial in August. They did not make their good returns in August by being short equities but by being long bonds.
In August managed futures gained 1.6%, according to the Barclay Hedge CTA index, significantly outperforming the Barclay Hedge Fund Index that was down 3.42%.
In September the Barclay CTA Index was up 0.3% whereas the S&P 500 index was down 7%. Other hedge fund strategies again underperformed CTAs with the Barclay Hedge Fund Index down 4.12%.
Yet there are also winners and losers within the CTA world. Ellis also underlined the difference between systematic and discretionary CTAs. Systematic trend following CTAs follow a computer- and volatility-driven model whereas discretionary managers are “people-driven businesses,” he noted.
Barclays Hedge data shows the bulk of the investment into managed futures ($250bn) is going to systematic traders with the $50bn rump being allocated to discretionary traders. Ellis explained that “the flexibility to keep in a trade irrespective of how it feels emotionally is the great strength of trend followers.”
This emotional detachment paid off in September with systematic CTAs outperforming discretionary CTAs by some margin. Systematic CTAs returned a positive 0.07% whereas the Discretionary Trader Index was down 0.26%.
Investors are also warming to CTAs because they can shift nimbly between bonds and equities, Ellis added, which would otherwise be a major asset allocation decision falling on the shoulders of the investor.
“Pension funds would say they themselves are not good at switching [between bonds and equities] because the time scales they look at are typically getting together once every three months, and changing [allocations] one time a year, so it is difficult to change monthly or quarterly.
“Pensions are bad at it, and generally badly advised on it. When equities have been doing well, for example, the asset allocation framework says to boost the allocation more to equities, which extends the moves.”
Ellis questioned if this was always the right decision, but said the money flows that result from such slow decision making can extend rallies for three or even nine months longer than they might otherwise persist.
CTAs could follow these longer-lasting trends, he added, in other words “making money out of what people do badly. The more consultants believe you can make money out of market timing, the better it is [for CTAs].”
Investors are taking note of the performance and correlation advantages of investing in long/short CTA strategies.
Ucits investors collectively managing €80bn have been surveyed by Malta-based platform provider ML Capital. Its survey concluded that demand for CTA strategies has doubled over the last quarter from 30% to nearly 60%.