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The best first half for CTAs in a decade

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Even with economic indicator alarm bells ringing, the winning streak for CTAs continues unabated.

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The best first half for CTAs in a decade

Even with economic indicator alarm bells ringing, the winning streak for CTAs continues unabated. Economic data releases have signaled a material growth slowdown in Q2 and most recent figures do not point to a turnaround. Factory orders in Germany shrunk -2.2% in May vs. April 2019 (-6.8% vs. May 2018), and manufacturing surveys suggest that industrial production contracted globally in June. 

In the meantime, the performance of CTAs just keeps creeping higher. The weekly performance at the start of the month was +1.1% according to the Lyxor CTA Peer Group, bringing the year-to-date performance to +9.6% as of July 2nd. Based on a benchmark with a longer track record (the SG Trend index), we estimate that trend followers had their best first half in a decade. The best first half ever for CTAs (since 1999) was in H1-2008, up +15.2%. 

The channel of transmission from a weaker global economy to robust CTA performance has essentially taken place through the fixed income market. Based on proprietary data, we note that CTAs’ net long position on bonds skyrocketed to multi-year highs at the end of June, and this position is particularly concentrated on European and US bonds. Concurrently, the net long position on equities is far below the levels observed in 2017 and early 2018. From this perspective, CTAs are a perfect hedge against a US recession just as this expansion—which started in June 2009—became the longest ever since the NBER started to date business cycles in the mid-19th Century.

Nevertheless, we do not anticipate a US recession in the coming quarters, and we are not especially concerned about growth deceleration considering this is following a period in which the economy was growing above potential. Job creation in June remained buoyant, trade tensions have de-escalated, and we believe market expectations about Fed rate cuts have probably gone too far. A repricing in bond yields from the very depressed current levels is increasingly likely. While the macro picture in Europe remains very bleak, if bond yields rise in the US, the German Bund will follow suit. Our views thus suggest investors should take advantage of the strong performance from CTAs as of late to take some profits and rebalance towards strategies that are positioned for a rise in bond yields—such as Systematic Global Macro.