With investors flocking towards equity yields, Zenith is reminding investors that commodity trading advisers (CTA) could benefit them in the long term.
In its 2013 CTA/Macro Sector findings, Zenith has said that CTAs are long gamma, which could be beneficial for long-term diversification.
“Medium-term CTAs have historically provided an offset at times of acute equity market stress,” Zenith head of alternatives Daniel Liptak said.
“This observation is the likely cause of many investors believing that CTAs are long volatility, when in fact they are long gamma (they become more exposed to a trend as it becomes more pronounced, regardless of direction).”
Zenith said that while CTAs can provide an offset in dislocated equity markets, they are “non- correlated” rather than “un-correlated” to equity markets and should not be used as a pure equity market hedge.
The group also reminded investors that not all market conditions are conducive to positive returns through CTAs.
“We also note that on a standalone basis, CTAs can disappoint but they typically display positive skew – the upside capture when a CTA programme captures a trend significantly outweighs the small losses while waiting for a trend to follow,” Mr Liptak said.
“In a portfolio context this characteristic significantly de-risks traditional assets.”
Zenith said that while the performance of many CTAs has been disappointing over the past 18 to 24 months, CTAs can be of value within a portfolio.
“Importantly, over a three- to five-year period, good CTAs often display protection from market volatility wrapped up with positive carry, after fees,” Mr Liptak said.
“Zenith believes CTA allocation should be part of the alternative allocation funded by proportionally reducing allocations to fixed income and equities,” he said.
