Wednesday, January 13, 2016

SocGen's new CTA mutual fund index - Is it different?

The '40 Act mutual fund space has grown significantly for CTA's and this sector now has its own index. It is not the same as the SocGen CTA index that has been reporting returns for the last fifteen years. A comparison between the SG CTA index and the SG CTA mutual fund index shows there is value in moving looking outside the mutual fund area. There are more managers to choose from which adds diversification from more styles of managers, timing of trades, and markets traded.

Starting a new index is never easy. You have to figure out the criteria for the constituent managers and actually back-fill to provide some history. The result of this construction is a new index which may not track the performance of similar existing indices. The existing CTA index has 20 managers while the new mutual fund index has 10 managers with a minimum size in the mutual fund AUM of just under $100 mm. There are only two names that overlap. Both are equally weighted. Our first chart shows the cumulative performance for the SG CTA index versus the CTA mutual fund index for the entire back-filled period, 2013 to the present.

The old CTA index and the mutual fund index matched closely through the fall of 2014 but then show increased differences that currently persist.  The overall correlation is approximately .86. A review of the managers may suggest that the broader index has more specialty programs in sectors such as commodities and FX.  The added diversification from more managers actually led to better performance.  The daily excess returns are obviously biased positive given the overall gain with the CTA index but there is a range of differences that fall within 50 bps up or down.

While the '40 Act CTA business has increased significantly over the last few year, there is still more choice available in traditional structures especially if you move outside the diversified trend-following space. We expect the gap between these two indices to close, but a broad search of managers may prove more useful for those investors who want high performance or more diversification. 

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