In a recent article by HFMWeek, Leon Beukes, senior investment consultant at Towers Watson is quoted as saying that they have for the first time added CTA/Managed futures strategies to their recommended list. Mr. Beukes cites an increase in willingness from CTA managers to provide transparency and reasonable fees as reasons for the new allocation.
As representing a manager in the CTA space, globally, we have seen an increase in transparency at the position level, return attribution level and overall an appetite for portfolio managers to discuss their investment theorems. The increase in transparency is a function of a number of themes within the overall economy and investment landscape.
In a post Madoff period, investors demand greater understanding in determining how a portfolio manager creates alpha and what are the sources of his returns. CTAs have three overall sources of return including trend definition (execution), asset allocation (art in portfolio development) and the most important, risk management (trend capture).
Moreover, increased competition in the CTA space is requiring portfolio managers to provide investors with greater clarity. While the majority of CTA allocations have gone to the largest firms such as Winton, MAN AHL and Aspect, demand for smaller managers had increased in 2011. Brighton House Associates recently published a 2011 survey of investors interest suggesting that 32% of all mandates received went to CTA/Managed Futures. CTA/Managed Futures according to them was the third most sought after strategy globally behind Long/Short strategies and Global Macro.
New product development for retail investors is not only opening the CTA investment strategy to everyone but also having an effect of increasing transparency. In particular, Managed Futures ETFs are becoming more popular such as the one being developed by Horizons in Canada. ETFs require greater transparency to ensure that counter-parties can hedge their positions and create ETF liquidity (exchange listed open interest) for investors. For the most part, ETFs also have the effect of price competition for active money managers which puts added pressure on defending their alpha generation.
The shear demand from investors for CTA strategies is also creating increased demand for transparency. US investors have strongly increased allocation to CTAs through 40 Act Commodity and Managed Futures mutual funds. In late 2011, Altegris Managed Futures Fund topped $1 billion in AUM growth in little over a year from inception. A number of other CTA 40 Act mutual funds are in development and will be launched shortly including two by Direxion Funds in February. UCITs structured CTAs and Global Macro strategies are also in high demand from European and Asian investors as ML Capital reported in their Q4 survey that “demand almost doubled over the last quarter from 30% to just under 60%” for these strategies.
In summary, CTAs transparency is increasing due to a number of changes going on in their investment landscape including a strong demand for the strategy and increased ability to invest through mutual funds, ETFs and UCITS.