Institutional allocators increasingly turn to managed futures strategies for diversification and drawdown control but often struggle to grasp the nuances of risk within these allocations. A clear understanding of which trend horizons significantly influence performance, the similarities among various managers, and how differing horizon mixes affect behavior during market stress is often lacking.
A new analytical approach dissects Commodity Trading Advisors (CTAs) by categorizing their returns into distinct trend horizons—fast, medium, and slow. This framework reveals that variability across managers largely stems from differences in these horizon mixes rather than in fundamentally different strategies. By focusing on this framework, investors can better understand overlaps, benchmark their investments more accurately, and ensure their exposure aligns with their portfolio objectives.
The study employs a library of mono-horizon trend-following strategies with varying look-back periods (20, 60, 125, 250, and 500 days) to analyze the SG CTA Trend Index and several anonymized CTAs. The results demonstrate that the performance of CTAs is significantly determined by their respective horizon allocations. For example, the index is primarily driven by mid and slow trends, while varying exposures can lead to differing risk-return profiles.
Ultimately, this horizon-based perspective provides a structured approach for allocators to assess both individual CTA programs and broader benchmarks. It allows for a more transparent evaluation of risk management, enabling informed adjustments in portfolio construction.
Why this story matters
- It highlights the complexity of managed futures strategies and the importance of understanding risk dynamics.
Key takeaway
- Horizon-based decomposition of CTAs provides clarity and can enhance investment decision-making.
Opposing viewpoint
- Some investors may argue that focusing exclusively on horizon mixes oversimplifies the range of strategies in managed futures.
