According to Daniel Liptak, Head of Alternatives, “With the performance of many CTA’s struggling over the last 18 – 24 months we believe that it is timely to consider the function and utility such funds can make to a portfolio.”
 
In Zenith’s observation Commodity Trading Advisors (CTAs) are an important strategy that should be considered as part of a diversified portfolio. Medium term CTAs have historically provided an offset at times of acute equity market stress.

This observation is the likely cause of many investors believing that CTA’s are long volatility, when in fact they are long gamma (they become more exposed to a trend as it becomes more pronounced, regardless of direction). Being long gamma allows this investment style to take advantages of being a liquidity provider in markets undergoing forced sales. Investors in CTA’s need to understand that not all market conditions are conducive to positive returns and, indeed on a standalone basis CTAs can disappoint.
 
In Zenith’s view medium term CTAs have often provided an offset in dislocated equity markets. But we are hesitant to class CTAs as being un-correlated to equity markets, rather on the whole they are non-correlated to equities. This is an important observation, as this suggests that the returns from CTAs are independent of equity markets but are not a pure equity market hedge and should not be used solely for that purpose in a portfolio.
 
CTA’s are offered with a variety of targeted or realized risk levels. Investors should note that a fund with a volatility target of 8% and another with 16% should be allocated on a risk weighted basis. This means that if an allocator is looking at investing to only one fund and is capital constrained a smaller allocation to the higher volatility CTA, in general, will provide the same outcome to a portfolio as an allocation of twice the size to the lower risk CTA. This frees up scarce capital to be placed in other opportunities. It also may reduce the fee drag on the whole portfolio.
 
We also note that on a standalone basis CTAs can disappoint but they typically display positive skew – the upside capture when a CTA programme captures a trend significantly outweighs the small losses while waiting for a trend to follow. In a portfolio context this characteristic significantly de-risks traditional assets.
 
The systematic approach to risk management and portfolio construction coupled with ongoing research provides a strong rationale for the fees charged. Importantly, over a 3 – 5 year period good CTAs often display protection from market volatility wrapped up with positive carry, after fees.  
 
Zenith believes CTA allocation should be part of the alternative allocation funded by proportionally reducing allocations to fixed income and equities.”
 
Review Findings
From an initial universe of 64 CTA / Macro funds, 6 were rated “Highly Recommended”, 10 were rated “Recommended”, 3 funds were rated “Approved” and 45 were “Not Approved”.
 
Receiving Zenith’s top rating accolade were the BlackRock Scientific Global Markets Fund, GMO Systematic Global Macro Trust – Class B, Man GLG Global Macro (AUD), Aspect Diversified Futures Fund – Class A, Man AHL Alpha (AUD) and the H3 Commodities Fund.
 
New ratings included a Recommended rating on exciting new Sydney based Macro fund MST Global Fund and an Approved rating on resource specialist Taurus Enhanced Gold and Precious Metals Fund.

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