Philippe Ferreira

Philippe Ferreira

Director, Senior Cross-Asset Strategist

Lyxor Asset Management


02 Oct 2018

Active Strategies

What is a CTA? 

A Commodity Trading Advisor, or CTA, is an absolute return strategy that has particularly interesting features.

It is systematic, which means that asset allocation is guided by a rules-based approach. Hence, it avoids most behavioral biases that are present in discretionary strategies.

Most CTAs are trend followers. They allocate assets according to market trends. For instance, oil prices experienced a severe fall in 2014, down almost 50%. CTAs captured this downward trend with short selling positions, enabling them to deliver returns close to 20% that year.

Why invest in CTAs?

CTAs are attractive for diversification purposes. In 2008, CTAs were up in excess of 20%, while the MSCI World was down by almost 40%. Yet, the long-term correlation of CTA returns with equities and bonds is close to zero. The strategy is thus complementary with discretionary allocations and many institutional investors use the strategy for risk mitigation purposes. Most funds are multi asset and global from a geographical perspective.

The strategy bears no liquidity or counterparty risk because it invests in futures contracts. Yet, as any financial asset, CTAs can experience periods of negative returns when trends reverse. It is thus directed to informed investors and bears the risk of capital loss. The assets under management of the strategy represent approximately USD 300bn.

Our outlook on CTAs.

Our views on the strategy are rather constructive. In a context of rich valuations across asset classes and elevated political risks, downside risks for financial assets have increased and the strategy has the potential to protect portfolios.

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