Guillaume Jamet, manager of the Lyxor Epsilon Global Trend Fund, explains in this interview with Funds Society why CTAs are an interesting option for investors in the current environment.
Taking into Account the current market situation, which are, in your opinion, the reasons why Alternative UCITS are becoming so popular?
In the current market environment traditional asset classes offer few entry points. Due to (ultra) low interest rates fixed income offers an unattractive risk / reward profile: carry is low and it seems unlikely that rates will decrease even further. Equities suffer from relatively high valuations across the board and from weak global growth trends, particularly in the US. In such an environment it is logical that investors turn to alternatives.
We see that in Europe alternative UCITS are doing very well. A broad set of alternative strategies has become eligible for UCITS wrappers since the UCITS III introduction in 2003. However, the credit crisis of 2008 has been a real turning point: since then regulators are actively stimulating the usage of UCITS legal vehicles, rather than offshore constructions. Investors appreciate the protective elements of the UCITS framework, such as concentration limits.
Which are the most demanded strategies? Are CTAs among them?
Morningstar data shows us that the top 4 collecting strategies in April 2016 are, in decreasing order of collect: Multistrategy, Market neutral-equity, Long-short equity UK and CTAs. The strategy has gained in popularity relative to 2015, where CTAs were “only” the 6th largest collector. Due to the straightforwardness of their investment process and their ability to have a managed volatility, CTAs appeal to all investor types. Our own investor base includes amongst others banks, family offices, pension funds and distributors.
Which is the main advantage of including a CTA in a portfolio? Performance, diversification… and why?
Both performance and diversification. Performance of CTAs has historically been strong. The SG Trend Index, a performance indicator for the trend-following strategy sector, generated 6.5% annually since inception in 2000, clearly outperforming equities and bonds. CTAs offer true diversification opportunities to investors. Firstly, the strategy is intrinsically diversified: as it focuses on price data, all asset classes and markets can be reached in a single portfolio. Secondly, correlation between CTAs and traditional asset classes is low or even negative. Consequently, adding a CTA to an investment portfolio with traditional investments can significantly improve the portfolio’s risk/return characteristics. Thirdly, CTAs tend to do particularly well in periods of crisis as many asset classes show clear trends. Thanks to this “crisis alpha” ”, CTAs offer diversification when investors need it most. As an example: Epsilon Managed Futures generated 38% during the credit crisis, whereas the MSCI World Index plunged by 59%.
Their truly de-correlating characteristics make CTAs stand-out from many other alternative strategies. What many investors do not realize is that most hedge funds have a positive correlation with equity markets. E.g., the HFRI Fund weighted index, an indicator of general hedge fund performance, has a correlation of 0,74 with the MSCI World Index calculated over the period 1991 – 2015. Many strategy-specific hedge fund indices, such as the HFRI Equity Hedge (equity long / short), HFRI Event Driven and HFRI Relative value (fixed income long / short) also have a correlation of more than 0,5 with the MSCI World Index over the same period.
Which are the characteristic of your fund you would highlight over competitors?
First of all our track record. The Epsilon program was launched in 1994. Since then we continuously invested into research and development of the model, systems and infrastructure. Epsilon Managed Futures, one of our two flag ship funds, has an annual performance of 8,0% since inception in 1997. Secondly, our investment approach. We are a true trend follower, without any discretionary portfolio manager intervention. Many other CTAs apply an amalgam of techniques, making them opaque to investors. In our peer group of CTAs we are amongst those which have the lowest correlation with both the SG Trend Index. Thirdly, our diversification model. Many CTAs diversify equally over markets. Our proprietary research shows that this can lead to sub-optimal outcomes as many markets are correlated.
Which are the main risks the CTA strategies front nowadays?
Frankly, I don’t see any major risks. What is important for investors to realize is that CTAs generate their performance during relatively short periods. Most of the time CTAs generate zero, or even slightly negative performance, while “seeking” trends. During such periods, investors need to hold on to their investments, knowing that performance will be generated once two market conditions have been fulfilled: markets show clear trends and correlations between asset classes are low.
For Alicia Miguel Serrano
For Funds Society, Madrid