Hedge Fund Investors Retreating from Underperforming CTAs

Apr 24 2017 | 6:05pm ET

Underperformance by CTAs for much of the past 12 months has noticeably lessened investor appetite for the trend-following strategy segment, according to new research from Preqin. 

Ongoing performance difficulties experienced by CTAs, which use sophisticated quantitative algorithms to establish investment positions, led to losses of 0.30% in Q1 2017 and have returned -1.07% over the past 12 months, Preqin said in its first quarter hedge fund update. In contrast, the wider hedge fund industry recorded its best start to a year since 2013 and generated gains of 11.65% over the past 12 months. 

Investors have noted the sustained underperformance by CTAs, Preqin’s research suggests. The proportion of total hedge fund investor searches issued for CTAs fell by more than a third in Q1 2017, dropping to 7% from 25% in Q4 2016. 

Other highlights from Preqin’s Q1/17 report:

  • Discretionary CTAs generated gains of 0.12% through Q1 to drive 12-month returns to 6.18%, but systematic CTAs have lost 3.28% over the past 12 months.
  • Over 12 months, US-based ALPHA Z Futures Fund LLC is the top performing CTA fund with returns of 71.28%, while second-ranked DeltaHedge VIXVOX Program has posted gains of 56.36%. 
  • Despite the underperformance, fund managers still see opportunities in the CTA space. The proportion of launches accounted for by CTAs rose to 11% in Q1 2017, up from 8% in Q4 2016. 

  • Asset flows also remain healthy. CTAs recorded inflows of $25.5 billion over 2016, with total assets rising by 12.3% to $251 billion. No other top-level hedge fund strategy witnessed positive asset flows last year. 

“Despite the return to form of hedge funds in the past 12 months, investors remain cautious when it comes to this area of their portfolios,” said Amy Bensted, Preqin’s head of hedge fund products. “CTAs, in particular, may find fundraising increasingly difficult over the rest of 2017 if the reduced appetite indicated by the diminishing proportion of investor searches is not reversed." 

Founded in 2003, Preqin is a leading source of information for the alternative assets industry, providing data and analysis via online databases, publications and bespoke data requests. More than 40,000 professionals in 90 nations use the company’s products.

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