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Institutional Investors Crowd Into Active CTA Market

Date: Wednesday, November 21, 2012
Author: Paula Vasan, aiCIO

Institutional investors active in CTA funds have more than doubled since 2008, Preqin says.

In the last five years institutional investors have roughly doubled their allocation to Commodity Trading Advisor (CTA) funds, which commonly advise investors on the use of future contracts, according to an in-depth analysis by research firm Preqin.

There are now 713 global institutional investors with an active CTA portfolio, a significant increase on 2011, when the number stood at 504, and 2008, when just 331 had CTA funds in their holdings, according to the research firm.

“CTA/managed futures have often been regarded as an 'all-weather' investment choice, with historical performance characteristics that make the strategy highly relevant during periods of relatively low returns and generally rising asset class correlations," according to Amy Bensted, Preqin's head of hedge fund products. "Year on year, more investors are adding CTAs to their portfolios of alternative asset funds in order to tap into this diversified liquid source of alpha. Correspondingly, more managed futures vehicles are being launched in order to cater to the growing interest in the strategy. Despite recent disappointing performance by CTA vehicles, investor interest in the strategy continues unabated with 14% of fund searches initiated in October 2012 including a managed future mandate.”

According to Preqin's findings, 42% of funds of funds invest in CTAs. Public pension funds also show a strong appetite for CTA vehicles, Preqin found, with 25% having a preference for such funds. The largest number of CTA launches was noted in 2011: 165 managed futures programs tracked by Preqin were launched last year.

In terms of performance, CTAs have returned 2% YTD and 0.35% annualized over the last 12 months compared to 6.32% and 8.02% respectively for the wider hedge fund industry.

The uptick in CTA popularity among institutional investors jibes with comments made by Agecroft Partners' Don Steinbrugge, who has noted that the number of pension plans allocating to hedge funds has increased over the past decade, along with the percent of their average portfolio allocation. CTAs have only recently been accepted as a core hedge fund allocation among schemes to lower volatility, he says. While he finds Preqin's expectations about CTA popularity "a little high," he notes that more assets have gone to CTAs than any other hedge fund strategies since 2008. According to Steinbrugge, over $300 billion, or 15% of the hedge fund market, has been allocated to CTAs. "Public pensions like CTAs because they're not correlated with other asset classes, and also because of their transparency and liquidity."

See Preqin's analysis here.

Steinbrugge says: "I'm seeing a big amount of search activity among public pension funds in North America. They're looking for strategies not correlated to long-only benchmarks."

Contact the writer of this story:
Paula Vasan
Paula Vasan
Managing Editor, aiCIO
Follow on Twitter at @ai_CIO