A Closer Look at the Average Historical Return for CTAs

A lot of talk on Twitter this week pointing out that CTA / managed futures/trend following has been doing quite well during this sell-off and rally in commodity markets like Oil….without much in the way of investor interest??

What gives? Well, it looks like there’s some confusion on just what the CTA return profile looks like:

Who are the idiots that didn’t put that information in THE GUIDE to trend following (download the free whitepaper here)… that would be us. But, hey, what’s a blog for if not for being able to help fix and explain your own issues. So what does the average historical return look like for CTAs? Glad you asked. Here’s 21 years of data from 2000 to Dec 2021 on the main indices we use internally here at RCM.

Past performance is not indicative of future results.

So… about a 4.5% annual compound rate of return, with 11% yearly volatility and an 18% max drawdown. Compare that to 8.7% returns/ 17% vol / -41% DD for Gold, or 7%/15%/-50% for stocks, and maybe that’s why investors aren’t banging down the door to access CTAs?

But let’s take a step back and consider what CTAs are trying to do and where they can really shine for the portfolio. Take a look at their 20+yr performance alongside commodities and bonds – you know – the things that make up the bulk of their portfolios:

Past performance is not indicative of future results.

Because they can go long and short commodities, they’re able to outperform a simple buy and hold commodities drastically in terms of the volatility and max drawdown. Who in their right mind would hold a long only commodities allocation through 161 months of drawdown… ouch. If you take anything away from everything we say about CTAs, have it be that it’s a heck of a lot smarter and less painful to trend follow commodities than just buy and hold them.

Which brings us to bonds. That’s quite a Sharpe ratio for something that is mostly nothing – give your money to the U.S. govt, get it back with interest a bit later. But what do you do now? After the 20-year bull run in bonds (rates to historic lows). CTAs enjoyed that run…. And are now enjoying the sell-off! They go short bonds too (rates higher), and while it won’t look just like capturing the uptrend – it’s sure to capture some of it like we’ve seen over the past few months, leading some to consider CTAs in this environment as a bond replacement.

So, there you have it @dallinar – the historical return profiles. Of course, all of this ignores the ‘when’ and is just the ‘how much’. The ‘when’ can be much more important in the case of CTA, with their returns tending to cluster around periods of increased volatility, increased inflation or interest rate movements, and during stock market crisis periods like the dot com bubble and GFC. But, there’s an infographic for that: 

 

Disclaimer
The performance data displayed herein is compiled from various sources, including BarclayHedge, and reports directly from the advisors. These performance figures should not be relied on independent of the individual advisor's disclosure document, which has important information regarding the method of calculation used, whether or not the performance includes proprietary results, and other important footnotes on the advisor's track record.

Benchmark index performance is for the constituents of that index only, and does not represent the entire universe of possible investments within that asset class. And further, that there can be limitations and biases to indices such as survivorship, self reporting, and instant history.

Managed futures accounts can subject to substantial charges for management and advisory fees. The numbers within this website include all such fees, but it may be necessary for those accounts that are subject to these charges to make substantial trading profits in the future to avoid depletion or exhaustion of their assets.

Investors interested in investing with a managed futures program (excepting those programs which are offered exclusively to qualified eligible persons as that term is defined by CFTC regulation 4.7) will be required to receive and sign off on a disclosure document in compliance with certain CFT rules The disclosure documents contains a complete description of the principal risk factors and each fee to be charged to your account by the CTA, as well as the composite performance of accounts under the CTA's management over at least the most recent five years. Investor interested in investing in any of the programs on this website are urged to carefully read these disclosure documents, including, but not limited to the performance information, before investing in any such programs.

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