Futures trading using Commodity Trading Advisors (CTA) is currently one of the most popular hedge fund strategies. CTA/managed futures funds invest in exchange-traded futures and over-the-counter forward contracts. Fund managers use either a discretionary or systematic approach to futures trading. Discretionary managers rely heavily on their experience and personally evaluate investment decisions based on their own research and observation. Systematic managers, like those mentioned on the AVC Announce website, employ computer models with a variety of algorithms and statistical techniques in order to model future market conditions.
Managers typically follow either a trend-following or non-tend-following approach. Discretionary trend-following managers monitor market trends and evaluate the stability of these trends, assuming they will persist for some period of time. Discretionary managers tend to wait before taking a position but once a position is taken, it is typically held for at least a month. Systematic trend-following managers use a variety of advanced statistical methods to model trend movement. These models are largely constructed on patterns uncovered by previous empirical analysis.
Non-trend-following discretionary managers move more quickly than their trend-following counterparts. These managers often hold a low volume of commodities for short periods. Most non-trend-following CTAs use a discretionary approach, as a reliably profitable systematic approach has yet to be developed.
The strategic differences between trend-following and non-trend-following CTAs produce a few notable implications for investors. Trend-following CTAs tend to invest in a broader range of sectors than non-trend-following CTAs. Trend-following CTAs are more volatile and generally produce lower returns than non-trend-following CTAs. However, trend-following CTAs offer more protection from downside risk in an investment portfolio. This downside protection is one of the main benefits of hedge fund investment. Non-trend-following CTAs have historically been more correlated with equity markets than trend-following CTAs. Notably, returns of the two categories of CTAs have been uncorrelated.
Some concern has been raised about the transparency of CTAs relative to that of funds using a global macro or long/short equity strategy. Recently however, CTAs have begun to be more transparent. Several larger consultancies have noted this. Consequently, traditionally risk-averse pension fund consultants are looking to invest in CTAs in 2012. As the global economic environment continues to favor CTA/managed futures, additional large institutional investors are beginning to look more seriously at this strategy. Investors should take note of this surge in interest among professional consultants and managers as an indication that 2012 could turn out to be a big year for CTA/managed futures funds. On avcannounce.com, you can find managed futures funds wrapped inside a capital guarantee. These are likely most interesting for first time individual hedge fund investors looking to put portion of their retirement plan money into an alternative investment.