Philippe Ferreira

Philippe Ferreira

Director, Senior Cross-Asset Strategist

Lyxor Asset Management


CTAs Are Back As A Diversification Strategy

16 Apr 2018

Investment Partners

Recent market developments saw an easing of market tensions as we head into the U.S. earnings season. Yet, geopolitical concerns remain and trade wars have legs, in our view. The overall backdrop is tactically supportive for risk assets after the recent 6% drawdown of the MSCI World since the peak on January 26th. But our appetite for risk remains limited from a strategic standpoint. The 3-month correlation between equities and bond returns remains in positive territory, limiting portfolio diversification options.

In the hedge fund space, low beta strategies continued to perform well over the recent weeks. Over the last month and since the beginning of April, CTAs and L/S Equity Market Neutral outperformed. Merger arbitrage has been resilient, especially in light of the widening of deal spreads since the beginning of April, which we discuss on page 2 of this report.

In the context of the positive correlation between equity and bond returns and in light of rising political risks ahead of U.S. midterm elections, which the trade war rhetoric exemplifies in our view, we find that CTAs are increasingly attractive for portfolio diversification purposes. Their stance on equities has been dramatically cut to virtually zero over the recent weeks while their stance on fixed income is moderately long. The strategy will not capture any market rebound but from a strategic standpoint, it has gained back its diversification benefits. Critically, the strategy will provide protection if risk assets experience a major drawdown going forward. Historically, the strategy has provided much needed protection during large and long lasting equity market selloffs (early 2000s; 2007-2009; eurozone crisis; mid-2015 early 2016). While we are not expecting an imminent major correction, investors might find that CTAs are attractive to hedge tail risk events at present. As a result, we upgrade the strategy from Underweight to Neutral. A neutral stance on CTAs implies a 10% allocation in a hedge fund portfolio (based on BarclayHedge data).


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