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declined by ~4%, in sharp contrast to their average ~25% growth rate during 1980-2011.
During the 2011-2013 period, CTA funds delivered relatively poor performance (Figure 5). This was perhaps
the main
reason behind the slowdown in asset inflows since 2011 (Figure 6). Many investors asked us to explain this
underperformance and provide an opinion on the future CTA performance.We did not have to wait long to
see CTA
performance sharply rebound in 2014 and 2015 with a +11.8% return over the past 12 months for the
BarclayHedge CTA
index – the best 12 month return since 200811. It is widely believed that strong outperformance reflects
the ability of
Momentum strategies to capture the strong recent trends in commodities (particularly the ~50% oil drop
over the past 6
months) and currencies (in particular the ~25% USD rally against various global currencies).
To analyze the key drivers of the poor performance during the 2011-2013 time period, and recent strong
performance of
CTAs, we replicated a CTA benchmark with a set of exposures to our prototype Momentum strategies in
Equities,
Bonds/Rates, Currencies, and Commodities (see details in the next Chapter) as well as to isolate the cash
return component.
Figure 7 (with further details in the section ‘CTA Exposure to Prototype Momentum Factors’ on page 48),
shows that afterfee
CTA returns to investors fell from an average of +7.4% (of which +4.1% were due to cash returns) during
1994-2010 to
-1.9% during the 2011-2013 time period. A main driver of the decline was the dramatic reduction in cash
yields since the
2008 crisis from an average of +4.1% to +0.6% per annum, which significantly affected the ‘cash-rich’
managed futures'
ability to generate absolute returns. The decline in cash yields was related to the secular decline in bond
yields, reinforced
by central banks’ counter-deflationary actions. This demonstrates how low yields find its way into every
segment of the
financial system (in this case central bank actions reduced the total return of a specific risk premia
strategy).
Figure 8, shows the breakdown of CTA performance into individual asset Momentum strategies. 12 One can
notice that the
2011-2013 deterioration of CTA fund excess returns during the recent 3 years was mostly due to the poor
performance of
Currency, Commodity and Bond related Trend Risk Factors and weak alpha. These exposures were also
responsible for the
12 Alpha and performance attribution were calculated assuming the average exposure of CTA funds to our
prototype ‘Trend Factors’
didn’t change during 1994-2014. The result is based on 10bps one-way turnover cost and 15bps monthly
slippage cost assumptions.
Lower (higher) cost assumptions would increase (decrease) Alpha. See more details on page 48 for our
analysis of ‘CTA Exposure to
Figure 6: AUM (USD bn) of CTAs and Hedge Funds (ex CTAs)
10
20
30
40
50
60
70
80
90
100
0
100
200
300
400
500
600
700
800
90 92 94 96 98 00 02 04 06 08 10 12 14
Poor Performance
During 2011-2013 0
500
1,000
1,500
2,000
2,500
3,000
50
100
150
200
250
300
350
1997
1998
1999
2000
2001
2002
2003
2004
2005
2006
2007
2008
2009
2010
2011
2012
2013
2014
16
15 April 2015
Marko Kolanovic
(1-212) 272-1438
marko.kolanovic@jpmorgan.com
(852) 2800-7749
zhen.wei@jpmorgan.com
record performance of CTAs in the second half of 2014. In addition, we see CTAs delivered Alpha of +7.1%
in 2014 before
* Based on the average of Barclay CTA Index, BTop 50 Index, DJCS CTA Index and CISDM CTA
Index. ** Cash returns are based on the J.P. Morgan 3-Month US$ Cash Index.
* Based on the average of Barclay CTA Index, BTop 50 Index, DJCS CTA Index and CISDM
CTA Index. ** Cash returns are based on the J.P. Morgan 3-Month US$ Cash Index.
4.1
0.6 0.0
3.5
2.7 2.4
3.3
-2.5
12.4
-4
-2
10
12
14
16
0.9
-1.2
1.0 2.6
-0.7
1.9 1.5
0.1
1.5 1.5
1.2
-0.3
4.1
0.6
0.0
1.6
0.7
9.5
-4
-2
10
12
14
16
17
15 April 2015
Marko Kolanovic
(1-212) 272-1438
marko.kolanovic@jpmorgan.com
(852) 2800-7749
zhen.wei@jpmorgan.com
18
15 April 2015
Marko Kolanovic
(1-212) 272-1438
marko.kolanovic@jpmorgan.com
(852) 2800-7749
zhen.wei@jpmorgan.com
19
15 April 2015
Marko Kolanovic
(1-212) 272-1438
marko.kolanovic@jpmorgan.com
(852) 2800-7749
zhen.wei@jpmorgan.com
Introduction
In this section we outline different implementations of a Momentum strategy, and study the historical
properties of a range
of simple Momentum strategies (prototype factors). Designing a factor entails the selection of underlying
assets, choice of
metrics used to identify Momentum, as well as various technical aspects of implementation such as
rebalance frequency,
investment horizon and transaction costs. Our prototype factors are based on 3, 6, and 12 month price
return signals and are
implemented in each of the traditional asset classes: Equities, Bonds, Currencies and Commodities. In
addition to historical
As we outlined in the previous section, the first step in designing a Momentum strategy is deciding whether
to employ
Absolute or Relative Momentum filters. Absolute Momentum Strategies (also called Time Series
Momentum, or TSM in
short) use trend indicators to determine the price trends of each asset individually, based on which a long
(or short) position
is established. An example is to use a simple 12-month price return: go long an asset with positive 12-
month return; stay in
cash (or short) asset with negative 12-month return. Relative Momentum Strategies (also called Cross
Sectional
Momentum, or CSM in short) employ trend indicators to rank assets on a relative basis. An example is to
use past 6-month
return to rank assets, then go long a portfolio of the top-performing assets and short a portfolio of the
bottom-performing
assets. If there is persistence in the relative asset returns, such a long/short portfolio would deliver a
positive return.
Figure 9 below compares a typical long/short Relative Momentum strategy with a long/short Absolute
Momentum strategy:
while a Relative Momentum strategy performs cross-sectional ranking of assets during each rebalancing, an
Absolute
Momentum strategy runs through each asset and determines long/short positions on an individual basis13.
Absolute Momentum could also be characterized as a special case of Relative Momentum by comparing the
relative trends
13 While long/short Relative Momentum Strategies could be designed to be market neutral, a long/short
Absolute Momentum Strategy
usually comes with time-varying market exposure depending on the trends of underlying assets. In addition
to long/short Momentum
strategies, one could also design long-only and hybrid Momentum strategies. See Chapter 2-3 of the report
for more details.
Asset 2
Asset 1
Asset N
...
Long Portfolio
Top Trending
Assets
Asset Pool
Short Portfolio
Bottom Trending
Assets
Rank by
Relative Trends
Long/Short Portfolio
Asset 2
Asset 1
Asset N
...