Sunday, January 3, 2016
Why CTA's did not make more money in 2015
If you are a managed futures trend-follower, you need market dislocations, divergences, to make money. You follow a mean-fleeing strategy. Most managers futures managers can be classified in this manner. If there are no market moves, that is, markets are range-bound, trend-followers will not have any viable opportunities.
If we look at the moves for 2015 in the futures markets, it is clear there were limited long opportunities. The major potential trends were from the short-side in the energy and metals markets. Unfortunately, these markets are usually the most volatile and have smaller weightings in the portfolios of most managers futures managers. The high volatility of these markets also makes it more likely to be stopped-out of positions or harder to find trend identification.
Clearly, it is hard to extrapolate from year over year changes but even a high level examination tell us that there were limited opportunities. For all trend-followers, there is a cost of trend identification both for entry and exists. If an arbitrary but reasonable threshold of 10% as the total entry and exit costs of trend identification is used, the number of market opportunities from the long side were almost zero. The largest markets would all fall under the threshold and the largest potential gains were from the short-side. Given this information, it is not surprising that the majority of managed futures managers, especially those who are diversified trend-followers did not have a good year.