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CTA Dispersion – High Levels in March

March was a month where volatility wreaked havoc to the markets, but also to most hedge fund strategies. The rare exception was tail risk strategies and to some extent Trend Following CTAs. Not all of the Managed Futures managers managed to have positive returns, but on average, the result was up a few percents. The NilssonHedge CTA index recorded a gain of 2.5% for March.

Given the observed dispersion for March and the need for diversification, we looked at the dispersion across the managers that are captured by our database. We broaden the scope to not only include March 2020, but also the prior six US equity market drawdowns (since the beginning of 2018).

Using all managers classified as CTAs in the NilssonHedge database, we find that the March-2020 had a positive result, where prior negative equity months had somewhat more muted results (CTAs had a positive median result in three out seven months).

What is noteworthy is that the dispersion (here measured as the interquartile range) was large. And while trend followers generally did better, other strategies had more mixed results. Today, most large CTAs belong in the Multi Strategy bucket and are no longer “style pure”.

While past performance is a poor determinant of future results, only 11 out 515 CTA programs, that have continuous reporting over since 2018, managed to generate positive returns in all seven equity market down months.

These managers were either non-diversified or generally focused on shorter-term strategies. One was a dedicated tail risk strategy, some focused on markets other than equity markets. On the flipside, at least two large CTA strategies failed to deliver positive returns in any equity down month since 2018. While CTAs are nowadays rarely described as tail risk strategies, most investor still have some positive expectations that they will generate positive returns in equity down markets.

To find out which managers generated positive returns, feel free to experiment with the database.

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