CTA Portfolio Investing

CTA Portfolio Investing in 2020:

In its simplest description portfolio investing provides the investor with a product that is diversified across, markets, asset classes and/or strategies. The diversification benefit has a clear statistical advantage over single-strategy or single-asset investments. However, as we all know neither portfolio construction nor investing is ever simple. On the other hand by using a methodical approach it does not need to be overly complicated either.

Our view to CTA Portfolio investing is to break down the stages into separate components. As the portfolio is being built then the interconnection between these components becomes clear and defined. Our broad approach to investing in CTA portfolios is a four stage approach. The first three stages address the market, strategy and investor needs independently. The final stage verifies and validates the constructed portfolio.

Analyse Backwards, look Forwards:

Dynamic markets will always seek to breach new levels and record new highs and lows. This however does not mean the history does not repeat itself, because it will. Therefore before looking into the new decade a valuable lesson can be learned by first analyzing the past. Market information is there and readily available to collect and evaluate. The challenge is to process this information into actionable knowledge. In our interpretation the importance of the market data against its historical timeline is not linear. Therefore when analyzing market volatility or fundamentals, a heavier weighting is placed on the more recent data set. Having an assessment on the current market environment is our first stage to building CTA portfolio investments.

In 2019 a broad rally was seen across most asset classes. Global equities in particular enjoyed significant gains as stock market indices rallied higher. Central banks held interest rates at low levels helping to inject liquidity and support a market rally. The risk of a global economic recovery slipping towards a recession was too high to ignore. A slowdown from the Chinese economic expansion was subsequently felt across the financial markets. Consequently, the increased market liquidity and reduced volatility impacted CTA strategies to the downside. As a subset to hedge funds, CTA strategies seek volatility to generate their returns. It was only towards the end of last year that market volatility returned to expected levels outside of the monetary or geo-political events.

Adapting towards Change:

As the market environment changes so should the trading strategies. This leads onto our second stage to constructing CTA investment portfolios. In our trading view it is the market environment that determines which CTA strategies are still relevant. Furthermore, we need to understand how the each strategy may respond and behave under the present market conditions. In effect the principles and trading philosophy behind each strategy must be able to adapt in order to seek returns. The investment case for CTA strategy investing is supported by empirical evidence, especially as a tool to diversify returns from traditional assets. To reduce downside risk, the benefits of layering multiple strategies into a portfolio strengthens this investment case.

The applications of CTA investment strategies within a portfolio have changed over the past decade. Post-2009 revealed fundamental weaknesses in the financial sectors that spread across most markets. During that time the purpose of including these hedge fund type strategies was to essentially hedge investment portfolios against the risk of tumbling markets. However as market risk dissipated due to a period of global economic growth, CTA strategies provided investors with return opportunities. This initially stemmed from the traditional trend-following programs to a broad range of investment strategies. Developments in trading technologies and deeper market liquidity have contributed towards more efficient trading models to seek return opportunities.

Clear Communication Channels:

Investment portfolios are designed to generate risk adjusted returns; however they must also suit the needs of the investor. Therefore communication must flow clearly between the investment manager and the investor. Creating unique portfolios of CTA investment strategies for each investor comes with its own challenges and business risk. However, stating clear investment parameters and definitions is a manageable process towards governing investor expectation. Understanding the investor requirements becomes a pre-requisite to building an investment portfolio. Risk and reward expectations must be matched to the CTA strategies that can generate the returns. Furthermore, these strategy components must be able to efficiently execute in different investment vehicles.

For these reasons we have created four portfolios that are tailored to the investor needs. These Multi-Strategy and Multi-Asset portfolios are constructed from a selection of CTA investment programs that we have verified against quantified data and qualified strategies.

  1. FX-Multi Strategy (Diversified)
  2. FX-Multi Strategy (Select)
  3. Multi Asset Allocation
  4. Trend Following (Diversified)

Optimizing for Success:

The investment goal of our CTA strategy portfolios is to produce the desired risk-adjusted returns under existing market conditions. Therefore in the final stage of constructing CTA investment portfolios our focus is on; monitoring, evaluating and optimizing. As a consequence the individual strategies are analyzed by their daily and monthly return profile. Any changes that are identified must be explained or validated, in order for that strategy to remain unmodified in the portfolio. To effectively manage our investment portfolios, firstly we optimize the idea generation process. Following this process each strategy is monitored on their correlations against other strategies as well as the broader market indices.

To optimize our CTA investment portfolios we use the following tools;

  1. Selection of verified strategies
  2. Leverage applications per strategy
  3. Portfolio exposure adjustments
  4. Discretionary input on Event risk

CTA Portfolios

Updated on 2020-01-24T19:17:06+01:00, by admin.