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No End to CTA Woes

According to BarclayHedge, top 20 Commodity Trading Advisor (CTA) average return in 2018 was -4.66%. In last 10 years, annualized return is slightly negative. Below is a chart and a list of 10 possible reasons for the sluggish performance.

Most CTAs in top 20 BarclayHedge category use systematic trend following. Below is a chart of top 20 performance from 01/1987 to 12/2018.

Despite a rebound in 2014, CAGR since 01/2009 is slightly negative and since 01/2000 it is only about 3.4%.

Reasons for the sluggish performance include but are not limited to:

  1. Limited flow of dumb money
  2. Use of “pedestrian strategies
  3. No barrier to entry and crowded space
  4. Capacity limitations and liquidity constraints
  5. Trends and trend-following are not the same thing
  6. Overriding strategy signals and loss of discipline
  7. Financialization of commodities
  8. Forexization of stock market
  9. End to long profitable downtrend in bond yields (at least temporarily.)
  10. Algo trading domination

All of the above have affected profitability but in our opinion 1, 6, 9 and 10 have had severe impact. Yet, trend-following and managed futures remain an important asset class and we may see a rebound in the future as a large number of players quit.

Needless to add that although average performance has been disappointing, there are always specific programs and funds that provided exceptional performance. However, identifying those in advance is not easy or simple task.

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