According to BarclayHedge figures, industry AUM increased 3.5% in 2009, 25.3% in 2010 and 17.5% in 2011, far outstripping gains attributable to performance alone. Over the five years since the crisis, performance has been roughly flat. Between the start of 2009 and the end of 2013 the Barclay CTA index has returned 0.71%. During 2012 and 2013, which the MSCI World returned 16.54% and 27.37% respectively, the Barclay CTA Index fell 1.7% and 1.45% respectively. By the end of 2013 the flow of assets had all but halted.
Industry AUM grew only 0.5% in 2013 and anecdotal evidence suggests redemptions are widespread. “Money is flowing out of CTAs because investors don’t have predetermined timeframes over which to judge them,” according to Julian Brown, director at JLT Employee Benefits. “When equity markets start to run asset prices and yields usually go up, and liabilities down. This creates a perfect storm. The last thing investors want at this point is to think about tail-risk or any asset class away from equities.
“Institutions are possibly guilty of one of the things they berate retail investors for, which is buying as things peak and selling as they bottom,” Brown continues. “It’s ironic, some institutional investors are exiting after a series of perhaps quite predictable disappointments in CTA-land when considered against equities over the short term.”
When is a crisis a crisis?
Unlike tail-risk hedging or insurance, there is no guarantee crisis alpha will produce outsize returns during every crisis, or indeed during ‘normal’ markets. While the last five years have been far from normal, CTAs have struggled to prevent the bleed during ‘normal’, strong equity years such as 2009, 2012 and 2013. In both 2010 and 2011 the VIX index spiked over 40, the threshold at which markets are considered to be fearful.
Both CTAs and volatility strategies largely failed to provide positive returns during those events. The spike in 2010 was caused by the 6 May ‘Flash Crash’, which saw a sharp downward correction in the S&P 500 of -9.06% during May and -4% in June. The Barclay CTA index returned -1.16% in May and 0.35% in June. The Newedge Volatility Trading index fell 1.38% and 1.55% accordingly. By year-end, both indexes were down 7% and 2% respectively.
During August, September and October 2011 the VIX spiked above 40 three times on the back of a US debt-ceiling stalemate and the peak of the eurozone financial crisis. Over August and September the S&P 500 fell -5.68%, -7.18% before rising 10.78% in October. During those three months, the Barclay CTA index and Newedge Volatility Trading index returned -0.36%, -0.09% and -2.27%, and -3.57%, -0.42% and 0.67% respectively. The CTA index finished the year down 3.09% while the Newedge Volatility Trading index posted a 1.1% gain. In neither the 2010 or 2011 events did either CTAs or volatility strategies, as measured by those indexes, pay out by achieving particularly high returns.
No guarantees
According to Tom Joy, director of investment at the Church Commissioners for England endowment fund: “It is potentially dangerous to think of CTAs as definitely giving crisis alpha. If the downturn is long and protracted, such as the financial crisis, which ran from mid-07 to March 09, they may do so, but CTAs have done terribly over the last few years. CTAs can provide crisis alpha, but there is no economic fundamental reason why they should do so.”
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