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CAIA Association Virtual Chapter: Panel discussion on new trends for institutional investment in CTAs

IN PARTNERSHIP WITH EFFICIENT CAPITAL MANAGEMENT AND CME GROUP

SPEAKER KEY

Joel Handy (JH), CAIA

Director of Business Development, Efficient Capital Management

Charles Alvarez (CA), CAIA

Associate Director of Financial Research

Keith Black (KB), Ph.D., CAIA, CFA

Virtual Chapter Head

Chris Solarz (CS), CFA, CPA, CAIA

Managing Director, Cliffwater LLC

Christophe L’Ahelec (CL), CFA

Senior Principal, Ontario Teachers’ Pension Plan

Jeremy Rosenberg (JR), CFA

Portfolio Manager, YMCA Retirement Fund

Adam Duncan (AD)

Managing Director, Cambridge Associates

CA: My name is Charles Alvarez and I’m the Associate Director of Financial Research as well as the Virtual Chapter Head at the CAIA association. I’m also joined today by Dr Keith Black, Managing Director of Curriculum And Exams, and Joel Handy from Efficient Capital, who will be moderating today’s event.

JH: We’ve got a great response from people in the audience and we’ve got a really great panel and content to bring to you today. Each one of the panelists will quickly introduce themselves and their role at their firm, and share about five minutes on an individual topic. Then we will go into a panel discussion and that will be followed by audience Q&A.

INDIVIDUAL TOPICS FROM EACH SPEAKER

CS: Thank you, Joel, and thank you, Charles and the CME Group for having me. Today we are talking about the case for CTAs.

CTAs are a liquid, systematic hedge fund strategy that have historically been uncorrelated to other hedge fund strategies and therefore offer nice portfolio-level diversification benefits. If we look at Fig.2, this chart plots the leading CTA index against equities, bonds, real estate, and hedge funds for five, ten, 15, and 20 years. You’ll see that CTAs have been slightly negatively correlated over ten, 15, 20 years to equities, which is why CTAs are so complementary in a value equity portfolio. CTAs have been modestly positively correlated to fixed income, but that’s not a bad thing considering fixed income has been in a 30-year bull market. Most institutional investors are underweight CTAs or systematic global macro funds and (nearly sight unseen) I would bet that a 10% or 15% allocation to CTAs would improve the Sharpe ratio of just about any institutional portfolio.

(As a point of clarification, there are four different terms – CTAs, managed futures, trend-following, and systematic global macro – that will likely be used interchangeably).

I love this chart (Fig.3), for two reasons: first, because it’s an optical illusion – that is actually a straight line – but second because it shows CTAs were profitable in each of the S&P 500’s six largest down years since 1980. Even in 2001 when the S&P fell 13%, CTAs were up about 1%.

So, I like to think of CTAs as a synthetically long volatility or quasi-tail risk product. This does not mean that you’re guaranteed to make money when markets fall but just that they’re uncorrelated and that’s exactly what you want in a portfolio: a collection of uncorrelated investments that each has a positive expected return. If we look at Fig.4, I charted the top six calendar years for the S&P since 1980.

Fig.1 Case for CTAs

Chris Solarz, CFA, CPA, CAIA

Managing Director, Cliffwater LLC

• CTAs are uncorrelated to other asset classes and have a positive expected return

• CTAs boost the Sharpe Ratio and reduce the drawdowns of client portfolios

• CTAs exhibit positive convexity and often perform well when market volatility increases

• CTAs are diversified across liquid futures markets; they do not gate clients

Fig.2 CTA correlation with overall market
Source: Barclay Hedge, Bloomberg Barclays, S&P, FTSE NAREIT and HFR
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