CTA / Managed Futures. A buying opportunity? by Yannis Katsis

31 May 2018

"While some investors might look at the current drawdown and worry about the risks, others will see this as a clear buying opportunity."

For many investors, it can be psychologically difficult to invest in an asset class after a fall in value and, by contrast, much easier to invest in an asset class that is currently performing well.  However, chasing returns, particularly in trend following managed futures strategies, can lead to much poorer results than making, or increasing, an allocation during a drawdown period.

The reason for this is that trend following returns are cyclical, because markets and the trends they exhibit, are also cyclical. As markets move through cycles, trend followers will adapt, exiting trends that are ending and entering new trends that are beginning. Allocating after a period of strong performance runs the risk of investing when trends are about to end, as no trend goes on forever. Conversely, allocating during a drawdown period, when old trends are ending and new trends are emerging, can present a better opportunity.

Recently, the trend following sector as a whole (as measured by the SG CTA Trend Index) experienced its biggest one month fall since March 2003 following the reversal of multiple trends across several markets in February. This has led to some people questioning the validity of trend following strategies, forgetting that the uncorrelated nature of such funds means that winning and losing periods will often occur at different times to their more traditional investments in equities and bonds.  This is exactly why, over the longer term, the inclusion of managed futures in a portfolio can help improve portfolio efficiency and overall risk adjusted returns.

Furthermore, historically it is quite normal for trend followers to have drawdown periods greater than 15%, but importantly, it is also normal for them to recover from these periods.  

Looking below at the SG CTA Trend Index since its inception in January 2000, there have been 5 occasions where drawdowns (peak to trough periods) have exceeded 15%, but each time this has happened, trend followers have recovered and gone on to hit new highs. In addition, it is worth noting that none of these drawdowns have ever been close to what we have seen in equity markets during the same 18 year period.

While some investors might look at the current drawdown and worry about the risks, others will see this as a clear buying opportunity.


SG Trend Index for web

















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