CTA funds could prosper in volatile 2012

Jan 03, 2012 by Charles Gubert

CTA (commodity trading advisor) hedge funds could be net beneficiaries of market volatility and see capital inflows in 2012 as a result, one manager has argued.

“Historically, volatility has been good for CTA managers and I believe they will benefit from their exposures in oil, gold and other commodities. Investors are going to take note and allocate money into these outfits,” said Peter Kambolin, chief executive officer at Systematic Alpha Management, a short-term systematic CTA with $150 million in assets under management (AuM).

CTAs have generated solid returns during extremely volatile periods. Research by Altegris Advisors revealed CTAs returned 43% on average during the technology bubble at the beginning of the millennium when US equities dropped 45%. During the recent credit crisis, managed futures generated nearly 20% returns despite a 50% decline in equities. There are widepsread fears about the viability of the eurozone going into 2012. Furthermore, the US economic recovery has been slow while emerging markets are showing signs of inflation and reduced growth. Many people are speculating 2012 will not be a pleasant year for alternatives.

According to BarclayHedge’s indices, CTA funds are down 3% year-to-date (at November 2011) while hedge funds have dropped almost 5%. Nevertheless, Kambolin is bullish about 2012. “A lot of CTA funds offer their investors generous liquidity terms, which a lot of hedge funds do not. I also suspect private equity firms which locked investors in are going to lose clients and these investors will enter the CTA space. A lot of people still have memories of 2008 but CTAs could stand to benefit because of this,” he said.

However, some CTA funds have faced criticism about their lack of transparency. Many employ black-box strategies and are reluctant to share their algorithms or formulae with operational due diligence professionals. Some investors purposely do not allocate to CTAs because of this.

“The lack of transparency is an issue for managers who have long-term investments, which could potentially be replicated by investors. However, we focus on short-term trends and we will only hold a position for a few hours sometimes – therefore, we are perfectly open with our investors. Despite this, CTA managers do have to be careful about what they share with their investors so full transparency could be problematic potentially,” said Kambolin.

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