Managed Futures – An industry in rude health?

Given that CTAs are on a record-breaking outperformance path compared to other hedge fund strategies, a relevant question to ask is if those returns are translating into additional AUM and a slew of new launches. The answer is “it’s complicated”…

First of all, most CTAs are doing well, or actually really well. The number of managers reporting high double-digit (or even triple digits) gains at end of the third quarter is beyond any reasonable ex-ante expecations. Especially within the largest category, Trend Following strategies are having an exceptionally strong year. On average, CTAs are delivering a strong outperformance compared to traditional and non-traditional asset classes, with the potential exception of Private Equity.

One measure of health is the attrition for the NilssonHedge CTA index, a high number typically indicates that managers, for a variety of reasons, stop reporting. This is typically due to underperformance or lack of business opportunities. A few select managers stop reporting due to excessive outperformance, but that is a handful of managers. This is a normal Darwinistic process, but on a year-to-date basis, we note a large improvement in the robustness of these asset managers.

This year, we have significantly lower attrition than in the prior years. Many more managers are deciding to continue to operate, a combination of good business outlook and more than acceptable returns. And potentially strong investor interests.

Looking at Flows, on the aggregated level (here defined as the change in aum adjusted for profits and losses), we note that CTAs are indeed seeing increased AUM, but the changes are fairly unremarkable compared to the increased interest. Looking over 12 months, flows are certainly positive, but largely offset prior outflows.

We do not capture all managers, and in particular, we are missing some of the really larger managers. Here flows are dominated by other factors.

A third way is to look at regulatory data, the NFA is disclosing the number of registered entities. Here we observe a number of things. 1) The total number of members is declining 2) No particular group is showing an upward trend, and 3) the number of people seeking to do business is also declining.

So, on the positive side, managers are behaving in a highly resilient manner, they continue to operate as trading strategies, and more managers than expected are surviving. Assets flows are marginally positive, but not significant. On the negative side, we see fewer and fewer entities operate as CTAs.