Published March 2015 Here we go again! CTAs have been declared dead before. This time, resurrection took a little longer than usual The value of diversifying CTA portfolios Why picking a few household names may just not be enough to do the trick The Lynx Story Svante Bergström, Lynx CEO and Co-founder talks about the early days 10 Fallacies to avoid when selecting CTAs Don´t be fooled by soft factors when selecting CTAs! MANAGED FUTURES / CTA What a Difference a Year makes! - A Case Paper “your single access point to the Nordic hedge fund industry” Contact Kamran Ghalitschi CEO / Publisher Nordic Business Media AB BOX 7285 SE-103 89 Stockholm, Sweden Corporate Number: 556838-6170 VAT Number: SE-556838617001 Direct: +46 (0) 8 5333 8688 Mobile: +46 (0) 706566688 email: [email protected] www.hedgenordic.com HedgeNordic CTA Industry Report | 3 Editor´s Note: Guess who´s back? Managed Futures for many investors only had some cameo appearances on the big screens until they had their first lead role in 2008, arriving to the rescue of financial-crisis struck portfolios like superheros. Ever since though, CTAs have struggled to find an environment to match historical returns. It seemed like the industry had met its Kryptonite in markets influenced and „manipulated“ by government and central bank interventions and politically influenced monetary and fiscal policies where volatility disappeared. Let us recap: From 2000 until 2008, Futures space, why the segment lagged local managers to the oldest and largest Barclay Hedge CTA Index showed positive performance for so long, what brought it in our region and some of the most returns every single year, and in 2008 back and what the lookout for systematic recognized names in the industry. We amidst the turbulence of the financial traders can be. believe to have a nice mix all across the crisis registered the highest annual return CTA spectrum, from specialized, niche since 1990. Since then however, the managers, broadly diversified trend index had four negative years; three of followers, CTAs with a multi-strategy which came back-to-back 2011 – 2013. approach, single and multi managers, To put this into perspective, in the entire “Seemingly out managers with a long bias or a system- 28 year period from 1980 until 2008 only atic macro approach represented in three individual years showed negative of the blue with this paper. returns. And never before were there even two back-to-back negative years. no apparent good Now granted, the end result of this paper The largest yearly drawdown in these is not an unbiased, deeply critical and (nearly) three decades was -1,19% in reason CTA´s analytical discussion about Managed 1999. What was most remarkable in this Futures and related strategies, their period however was not the depth of the were back like a possible merits and faults. Much rather drawdowns Managed Futures indices our aim was to carry together some of and / or individual trading programs knight in shining the key arguments CTAs have always suffered. It was the time off peak, the used to make their case, along with some time the index needed to recover from armor.” food for thought in a comprehensive yet the drawdown to achieve new highs compact paper. that was unprecedented. Enough said, enjoy the HedgeNordic And then came 2014, and seemingly The approach we took was to ask CTA Report! out of the blue with no apparent good those who should know the best, the reason, no equity market sell off and no managers, service providers, analyst Black Swan event, CTA´s were back like and allocators to CTAs. Rather than a knight in shining armor cutting through through a journalistic filter we invited the darkness with the drawn sword, the contributors to this paper to share setting new all time highs. their views in their own words. Kamran G. Ghalitschi CEO / Publisher At HedgeNordic we took this as a trigger We are pleased and humbled so many HedgeNordic to take a closer look at the Managed actors in the space, from small Nordic Alpha.4 | HedgeNordic CTA Industry Operations Report can play that game, too. To compete in today’s market, you need to get operations in the game. Northern Trust Hedge Fund Services brings you Operational Alpha®: the competitive edge that comes from increased efficiency, transparency and control. Access, configure and manage data in real time, for faster and better decisions. Enhance performance through data consistency and seamless integration. And improve your advantage with constant support, insight and ideas from people as innovative as our leading-edge technology. Contact Madeleine Senior (EMEA) +44 (0)20 7982 2239 or Struan Malcolm (Stockholm) +46 8 5051 6492 or visit northerntrust.com/compete. Mäster Samuelsgatan 60, 8th Floor, 111 21 Stockholm, Sweden Alternative Fund Administration | Operations Outsourcing | Investor Services | Custody © 2015 Northern Trust Corporation. Head Office: 50 South La Salle Street, Chicago, Illinois 60603 U.S.A. Incorporated with limited liability in the U.S. Products and services provided by subsidiaries of Northern Trust Corporation may vary in different markets and are offered in accordance with local regulation. For legal and regulatory information about individual market offices, visit northerntrust.com/disclosures. Directed to professional clients only. Not intended for retail clients. Facts & Figures on Nordic CTAs 8,1% Performance for NHX CTA in 2014 33,5% Best performing Nordic CTA 2014 (SEB Asset Selection Opportunistic) 6 Billion USD Largest Nordic CTA by AuM (Lynx) Alpha. Operations can HedgeNordic CTA Industry Report | 5 play that game, too. Content To compete in today’s market, you need to get operations in the game. Northern Trust Hedge Fund Services brings you Operational Alpha®: the competitive edge that comes from increased efficiency, transparency and control. Access, configure and manage data in real time, for faster and better decisions. Enhance performance through data consistency and seamless integration. And improve your advantage with constant support, insight and ideas from people as innovative as our Editor´s Note: Guess who´s back? 3 leading-edge technology. Contact Madeleine Senior (EMEA) +44 (0)20 7982 2239 or Struan Malcolm (Stockholm) +46 8 5051 6492 or visit northerntrust.com/compete. Content 5 An overview of CTA industry benchmarks 6 Mäster Samuelsgatan 60, 8th Floor, 111 21 Stockholm, Sweden Nordic CTAs stage massive comeback in 2014 8 Man AHL on the Nordics 11 Nominations: Best Nordic CTA 2014 12 Global CTA Asset Growth – Strong but Clustered 13 Alternative Fund Administration | Operations Outsourcing | Investor Services | Custody Turning Silver into Gold – the LYNX Story 14 © 2015 Northern Trust Corporation. Head Office: 50 South La Salle Street, Chicago, Illinois 60603 U.S.A. Incorporated with limited liability in the U.S. Products and services provided by subsidiaries of Northern Trust Corporation may vary in different markets and are offered in accordance with local regulation. For legal and regulatory information about individual market offices, visit northerntrust.com/disclosures. Directed to professional clients only. Not intended for retail clients. Here we go again! 16 2015 is unlikely to be another 2009 19 Does CTA portfolio diversification provide value? 20 The Decade of CTAs 24 Navigating Risk Cycles 28 10 Fallacies to Avoid when Selecting CTAs 32 Managed Futures in an institutional investor’s portfolio 40 Trend followers in for the long run 42 A consistent approach to macro investing 44 Another Rough Year for Commodities 48 Are CTAs “Long Volatility”? 50 What I learnt from the Top Traders in the World 52 6 | HedgeNordic CTA Industry Report An overview of CTA industry benchmarks Following the increased interest for CTA/Managed Futures strategies the supply of benchmark indices has grown rapidly. As an investor or potential investor in Managed Futures it is important to understand which index to use in order to give a fair comparison of your particular investment. The indices most commonly referred to are the Barclay CTA The DJCS Managed Futures Index is a narrow index Index, the Newedge CTA Index and the Dow Jones Credit currently composed of 31 constituents. The index is asset Suisse DJCS Managed Futures Index (formerly known as wieghted meaning that the larger trend following programs the CS/Tremont Managed Futures Index). These indicies have a greater impact on the total performance. Brummer have different characteristics and depending on what you & Partners Lynx is one of the constituents. are comparing some are more representative than others. The question if a leading benchmark index can give a fair The Barclay CTA Index is a broad index composed of more and representative picture of your individual CTA invest- than 500 constituents. The index is not only broad in terms ment depends largely on how your CTA investment looks of the number of managers but also in terms of the amount like. Typically a CTA investor has expsoure to only a limited of strategies included. This makes the index highly diversified number of the big trend following names in the industry, very and limits the performance impact of an individual manager. often no more than one to three funds. In this case, the most suitable comparison would be to use some of the narrower A more concentrated version of the Barclay CTA Index is indices focusing on trend following strategies, in other words the Barclay BTOP50 Index which currently includes 20 the DJCS Managed Futures or the Newedge CTA. names. This index represents those managers that hold the largest AuM and together account for at least 50% of In the case where the investor is running a portfolio with the total capital invested in the Barclayhedge CTA universe. a larger set of strategies, the Barclay CTA or the Barclay Among the Nordic Managers, Brummer & Partners Lynx and BTOP50 is likely to be the better choice.