The nature of CTA returns: high dispersion and low persistence
There is empirical evidence to show that CTAs experience high dispersion and low persistence in returns.
The magnitude of this return dispersion may be surprising for many investors, particularly as high dispersion can occur even amongst relatively highly correlated managers.
This return pattern is driven by differences in:
- sector allocations
- time horizons
- risk management methodologies
High dispersion and low persistence of returns makes manager selection challenging, particularly if investors are tempted to chase recent, strong performance.
A large multi-manager can add significant value for an investor, by realising economies of scale with respect to fees and costs, and having the infrastructure and expertise to allocate to, and appraise, managers on an ongoing basis.
Potential Benefits of Multi-Manager Portfolios
1. Combining CTAs in a portfolio may generate a better risk-adjusted return*
Blending uncorrelated managers may generate a portfolio with a lower drawdown and higher risk-adjusted return than a randomly selected single manager at the same level of allocated volatility
2. The more consistent return profile of the multi-manager portfolio may enable an investor to stay invested in managed futures
While a single manager may outperform a multi-manager portfolio in any given time period a multi-manager portfolio, diversified across trading strategies and time horizons, is likely to deliver a more consistent return profile for an investor over time.
This may enable the investor to stay with managed futures over the long-term and fully realise the portfolio benefits of adding managed futures to a multi-asset portfolio.
3. A multi-manager portfolio reduces the risk of being allocated to an underperforming manager at a time when positive performance from managed futures is most needed
By relying on an allocation to a single CTA, an investor could be unlucky to be allocated to a manager who significantly underperformed peers, at a time when positive performance would be particularly valuable in a portfolio context.
*Diversification does not assure a profit or generate protection against a loss