Q&A: Nell Sloane, Capital Trading Group
AlphaWeek’s Greg Winterton discussed investor attitudes to CTAs with Nell Sloane, Principal of Capital Trading Group.
GW: Nell, thanks for taking the time. CTAs are, on aggregate, struggling again this year, despite volatility returning to the markets. What are you hearing from investors regarding allocating to this strategy?
NS: Looking at it from the lens of the Barclay CTA index does present a disappointing picture. However, investors are selecting products and not investing in an index. They are looking at what is a fit for them specifically; the style of trading, markets traded, and overall risk adjusted returns. The objective is to have something in their portfolio that will that can hopefully smooth out volatility. For individual product lines, things don’t necessarily translate to such a dismal yield. While the Barclay CTA index might reflect a negative 1.61% for 2018 as of this writing, we have other managers in our database that returned a positive 7.92%, and a positive 6.96%. Past performance is of course not indicative of future returns, so overall, it’s about sorting through all the products and credentials of the managers and defining what the end client wants.
GW: CTAs have long espoused the uncorrelated nature of their returns. Yet being uncorrelated doesn’t help if they lose money. How are CTAs fighting that fire?
NS: Sophisticated investors do not expect to make money in every investment product they allocate to. They hope to achieve a smoother return stream by allocating to CTAs (commodity Trading Advisors) to manage a small % of their overall portfolio so when stocks do eventually have that 10 or 20% correction or more, their portfolio is not as impacted as if they have 100% in one particular asset class. One must also keep in mind that not every managed futures product will perform in the manner you expect just because it has in the past and not every product will achieve gains when the stock market does fall apart. Overall, it’s generating those return streams differently that makes them so unique.
GW: In 2008, CTAs, unsurprisingly, did very well on the short trades. Barclayhedge had the strategy up 14% that year. The current bull market has to end sometime, but outflows from CTAs have been on the rise. Do you think investors are in danger of getting caught short?
NS: A CTA’s role is to manage risk first and foremost. They are faced with many challenges in their businesses; managing risk is one, and paramount. Raising assets is another. Sustaining those relationships is even harder. Sustaining clients when they are losing money is dependent on how the client is sold in the first place, and if communication between manager and investor continues after they open. That communication needs to be more than sending out tear sheets, and should include offering webinars and open Q&A sessions. The best investors are the educated ones. Investors are fine when you are making money but when losses occur - and they will – it’s important to provide as much transparency as to why, as well as the expected time window for the recovery (but recognizing that there is no assurance they can recover).
I do think investors are in danger of getting caught short. Too much “fear of missing out” is the perception I’m hearing from many. That psychology causes losses.
GW: Are new CTAs which come to market doing anything differently in terms of positioning themselves to sell against the struggles of the asset class overall?
NS: Emerging CTAs are learning more about how to conduct their business like a business. What they are doing differently is taking advantage of venues like the CTA EXPO or other events to get exposure, and very much needed help from those that can provide real value. Many have learned to take advantage of the Introducing brokerage network in efforts to collaborate on their help in introducing assets.
GW: Managed accounts are one of the main benefits of CTAs from a transparency and liquidity perspective. Are you seeing more allocations going to these, or are dollars still flowing to pooled funds?
NS: I see less dollars going to commodity pools for many reasons. Fee compression is one key component. Pool restrictions - from both investor qualifications to how you can market it to the public and to whom can sell it – are also a factor. The fact that a pool is a security, so you are dealing with different regulatory oversights, is another. Single managed accounts provide easier access on a multi- faceted level.
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