Are CTAs One Another’s Competitors?

On average, the research team at aiSource speaks to one new CTA each week.  Many times, when these prospective CTAs have had good recent performance, they wonder why aiSource will not immediately consider them as additions or substitutions in our client portfolios.  They wonder “if other CTAs are not doing well, why are you not placing clients in my strategy?” When overall portfolio performance or managed futures asset class performance is down, it’s difficult to make allocations or substitutions to new CTAs.  Investors feel the “pain” of poor performance and often go on standby mode waiting for the performance to pick back up before they make modifications to their portfolios.

But aren’t investors looking for uncorrelated alpha when their other CTAs are performing poorly?

Yes, they are. However, they are less likely to make additions or substitutions when their portfolios are performing poorly.  When a clients portfolio is doing well, they are more open to considering new additions to their portfolio.  It’s a mild example of the economic term known as the “wealth effect,” which basically states that a person is likely to spend more with perceived change in wealth. The same applies to when a clients managed futures portfolio is doing well, they are more likely allocate their portfolio profits to new CTAs. 

What about CTAs that are involved in the same niche or market sector?

CTAs that trade very similarly (day traders, option sellers…etc), or trade in the same market sector (grains, meats, financials..etc) are the most qualified to consider one another as competitors.  If your CTA is providing uncorrelated alpha at a time when the other CTAs in your niche or market sector are performing poorly, then it’s very likely that you have potential to increase your AUM in a very short period of time.  Investors and portfolio managers will shift allocations to your CTA since their current allocation within that niche or market sector is not doing well. While this seems like an occurrence that likely happens often, that is not true.  Generally speaking, CTAs that trade similarly tend to have a high correlation to another, indicating that their performance peaks and falls at similar times.

How should a CTA differentiate itself to stand out amongst the competition?

First off, don’t look at other CTAs as your competitors.  It sounds counter-intuitive, but as a CTA you want the entire asset class to perform well, and even the CTAs in your niche.  If the entire asset class is performing well, that opens up opportunity for all emerging managers to be given a second and third look. Furthermore, better overall industry performance also leads to an influx of new investments coming into the asset class. This means more assets are available to be allocated to more CTAs.

In order for a CTA to continue differentiating themselves is, they must continue to perform well.  If your performance is consistent on a month-to-month basis, then you will remain at the top of an allocator’s “monitor” stack. Being at the top of the stack is where you want to be.