Michael: Are CTAs a quasi investment into a commodity index?

Michael: Are CTAs a quasi investment into a commodity index?

My concern: 

Until recently, alternative managers have been well diversified. However, as the space has grown, most managed futures products have become much too correlated to broad commodity indexes. If investors only get exposure to a broad commodity index when investing in most managed futures programmes, then they will eventually opt to invest in the indexes themselves to achieve the same benefits with fewer costs.

The Data:

We compiled our proprietary commodity index consisting of a weighted portfolio of all the commodity asset classes, including: agriculture, livestock, metals, energies and softs. We then calculated the correlation to the Barclays BTOP 50 index. We discovered the following results:

-From 2002 to 2009 the correlation was 18% or almost non-correlated.

-From 2009 to present, the correlation is 45% or correlated.

I do want to point out a potential inadequacy to this analysis. While the commodity index may experience prolonged negative periods, the CTAs may eventually profit from these downturns as they have the ability to take short positions. Therefore, if we were to filter out the negative periods, the correlation would be even stronger.

The selection process:

It has never been more evident that we must employ a strict and discipline approach to the selection of managers to reach the optimal diversification provided by alternative investments. We believe that in constructing an alternative asset portfolio that it is not adequate to simply choose a weighting of managers that are uncorrelated in terms of return and management style, but more importantly, one must build a compilation of managers that are non-correlated to the broad commodity indexes, as well.

It would also be prudent to analyze the correlation (of negative betas) between the manager’s portfolio and the commodity indexes during multiple period downturns, as, managers that are less correlated during (negative betas) theses downturns are reacting faster to the trend changes or are hedging more effectively to these changes.


Simply we believe that long term success in utilizing alternative managers as a means to diversify a traditional portfolio, reduce volatility, and increased absolute returns is in danger and becoming unsustainable. As the managed futures industry has become more mature we must not fall into the complacency trap which may be the result of exceptional market conditions. Our space has always been a driving force of innovation and it benefits us all to keep our eye on the ball and continue to provide the means to sustainable long term success through cutting edge thinking and the development of new ideas. Our success is dependent on being able to continue to deliver superior risk-adjusted results to our clients. Let us reinvigorate the spirit which brought us to this point and invest in our own success through forward thinking and continued innovation so we do not become, and are not measured just like “any other commodity index.”

Steven Michael is a director of Stonehenge Asset Management

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