A commodity trading advisor (CTA) is a US financial regulatory term for an individual or firm that makes investment decisions on behalf of clients in the commodities and commodity futures markets.
This may include services related to trading future contracts, swaps, or commodity options.
CTAs are responsible for trading managed futures accounts.
CTA managed futures are an increasingly popular product among institutional investors, as they offer a number of benefits over trading commodities independently.
These include access to different trading strategies that are largely uncorrelated to popular ones (i.e., being long stocks and bonds) and reliable risk management tools.
CTA is largely a systematic strategy
CTAs usually trade in a systematic way. They typically trade based on momentum and “follow the trend”.
Outsized sell-offs are almost always due to systematic players like CTAs and those delta hedging and dynamically hedging (i.e., selling more to avoid losses) and they buy during uptrends.
Delta hedging is generally a “faster” strategy than CTAs, as are volatility-controlled annuities.
Other market players like pension funds are slower, as is retail.
Some CTAs are also discretionary
Some CTAs do have portfolio managers who will make the decisions.
They might have an automated trading strategy going but will override any decisions that they don’t want to make.
Some will do a hybrid approach of both systematic and discretionary approaches.
Systematic CTA strategies are nonetheless more popular than discretionary CTA strategies by a factor of about 4x.
When do CTAs do well? When do they do poorly?
CTAs will tend to capture longer-term trends, and these trends should be expected during a normal business cycle.
For example, you will tend to see equities rising during the early parts of a business cycle, with the strongest gains happening earliest when the real economy is still weak.
Policymakers pump a lot of stimulus in to get everything going again (especially when they have a reserve currency).
So they will be long equities during periods where the strongest growth is likely to occur, which is early and mid cycle.
And they will generally be short during the late cycle, when there’s still commonly strong growth in the real economy but higher interest rates provide a cross-current and earnings declines may occur.
They tend to do poorly during choppier, more range-bound markets and when the news cycle doesn’t give definitive trends to markets.
When CTAs get their call on a trend wrong, they will typically be stopped out. However, when they get a trend right, they tend to ride the position until their algorithms or discretionary procedures tell them to do otherwise.
From this perspective, the “cut losses early” and “ride winners” approach is designed to give them a payoff profile similar to being long an option.
Who keeps track of CTA performance?
BarclayHedge is a publisher and database of hedge fund and CTA performance.
It has two indices for CTA – the systematic index, which includes systematic CTAs, and the discretionary index, which covers discretionary CTAs.
These two indexes cover manager performances and have since their inception in 1987.
The Systematic CTAs have around 400 constituents while the Discretionary CTAs generally have around 100.
How big are CTAs?
CTAs are nowhere near as big as most other investors. They are typically somewhere around $500 billion in AUM.
They trade futures, options, swaps, and other things that require less collateral compared to assets like equities.
Futures can often be traded at around 10x leverage for stock, bond, and commodity futures.
So even with a smaller asset base, they can still control more of the market than their AUM suggests.
Moreover, to flip positions easily they need to be smaller so they can be more nimble.
For longer-term investors or so-called whales who take up a material portion of their markets, it can take them months to unwind large positions.
Do CTAs have any long-term impact on price?
No, they are trying to capture a lot of trending moves, and they will flip their positions long or short as necessary.
They are much different from longer-term market players like pension funds, insurance companies, or sovereign wealth funds.
On net, they have no bias to be long or short and therefore have no long-term impact on prices.
In sum, they are traders, not investors.
Investing in CTAs
For those interested in investing in CTA managed futures, there are a number of factors to consider.
First, they are generally open only to institutional investors.
Next, you’ll need to carefully assess the trading strategy used by the CTA, as well as their track record and risk management procedures.
Moreover, it’s important to consider how much leverage is used in each trade and any potential fees involved with trading managed futures accounts.
Overall, CTA managed futures can be a quality investment option for those seeking exposure to commodities markets with lower volatility and potentially more reliable returns than traditional stock-picking strategies.
So if you’re looking for a way to diversify your portfolio and potentially increase your returns over time, CTA managed futures may be worth considering.
CTA managed futures are an attractive option for investors seeking to diversify their portfolios and potentially boost returns.
They offer a number of advantages, including access to different trading strategies, reliable risk management tools, and potentially lower volatility.
However, it’s important to carefully assess the CTA’s strategy, track record, and fees before investing.