CTA, macro strategies tipped to reverse

While CTA strategies performed well this year and macro funds lagged, there may be a reversal in their fortunes in 2015, argues Nicolas Rousselet, head of hedge funds at Swiss asset manager Unigestion.

Lyxor’s commodity trading adviser (CTA) index rose 8.2% in November, taking the year-to-date return to 12.9%, far better than the overall hedge fund index, which was flat for 2014.

The key to CTAs' strong performance this year has been the huge amount of money made from their long-bond positions, said Rousselet, but he is doubtful they will repeat that performance next year.

Much will depend on the speed of asset-price changes next year, he said. CTAs in general perform better from longer price trends than rapid moves in value, such as October’s sharp sell-off of equities and equally rapid recovery.

On the one hand, the market continues to be supportive for risk assets. “Central banks have stepped up stimulus, which is supportive of asset prices globally,” said Vikas Agarwal, co-portfolio manager of The Rohatyn Group’s Asian macro strategy.

The three largest central banks outside the US – the Bank of Japan (BoJ), European Central Bank (ECB) and People’s Bank of China (PBoC) – are easing at same time, he added.

Pictet Wealth Management’s Asia CIO, Bhaskar Laxminarayan, said monetary policy will continue to rule markets next year. “Since 2008, you haven’t had to look at fundamentals, just at who’s printing money."

On the other hand, economic and policy cycles have become dislocated, which will create additional volatility next year, argued Olivier d’Assier, Axioma’s Asia-Pacific managing director.

The BoJ, ECB and PBoC are expected to continue their stimulus programmes in 2015, while the UK and US central banks are expected to raise interest rates. Rousselet sees that dislocation as favourable for global macro funds.

Currency moves are becoming more pronounced, which is conducive for tactical trading, he said.

In the first 11 months of 2014, global macro strategies lost 1%, according to Lyxor’s index. They suffered because they were short US and European fixed income this year, with many only turning around mid-year on the back of the dollar rallying, said Lyxor. 

The dollar has risen 11% against the euro and 19% against the Japanese yen over the past five months.

Big Asia-focused macro funds have seen mixed fortunes this year. The $3 billion Singapore-based Dymon Asia Macro Fund achieved a 17% return in the first 10 months of 2014, versus its historical annualised return of 10%.

In contrast, the $2.8 billion Fortress Asia Macro Fund lost 4.9% in that period, versus its longer-term annualised average of 9.4%.

Other large Asia-based hedge strategies that have performed notably well this year include the $885 million Segantii Asia Pacific Equity Multi-Strategy Fund, up 29% in the year to November and the $438 million Amazon Market Neutral Fund, which rose 14.5% in the same period.

As for next year, In Laxminarayan’s view, everything rests on what happens in the US. He was bullish on markets where there is growth, which would cushion the effects of a stronger dollar.

Rohatyn’s Agarwal argued that US outperformance is likely to continue in 2015. “Balance sheets are in a better shape and consumers have had a windfall from lower oil prices," he added.

He too favours growth markets, such as India and Indonesia. “These markets are attractive versus low-yielding markets – such as the Philippines, Malaysia or Thailand – which are more at risk if and when the Fed tightens,” he added.

Meanwhile, Rousselet said the year ahead might be tough for event-driven strategies because they are relying on US equity markets continuing to rise. He said the country’s equity and credit markets are fully valued so there is limited upside.

“A lot are very long the market and have too much beta,” he said.

Event driven declined 1.9% year-to-November, according to Lyxor, including a 2.5% decline for merger arbitrage and a 0.6% drop for special situations-focused managers.

Event-driven managers were not bullish at the start of 2014, but they needed the market to deliver, so they turned activist, said Rousselet. He saw the push to make the market deliver via corporate actions such as mergers and acquisitions, as a sign of the end of the current post-global financial crisis cycle.