Opportunities in the CTA Industry

Opportunities in the
CTA Industry

MSF Enterprises LLC

January 2014
Copyright © 2014 MSF Enterprises, LLC

CTA Manager Quiz
• Is the velocity of your fund flows 2-3 times the volatility of your fund?
• Do you have the same investors from 5 or 10 years ago?

• Are you tired of watching money flows shift away from the CTA
industry to the benefit of other investment strategies?
• Do you have the staying power to withstand more than 24 months of
flat-to-negative returns?
• Is your performance negatively correlated to equities? How did you
perform in 2001, 2008 and 2013?
• How does your business perform when equities are posting doubledigit gains?

2

Self-Reflection
• What steps can you take to make your strategies more profitable?
• Have you asked your clients about other ways you can help their
portfolios?
• Do higher returns = increased profits?
• How often do you evaluate your business model?
• Where do you see yourself in five years? Where do you see your firm in
five years?

“Insanity: Doing the same thing over and over again and expecting
different results.”
- Albert Einstein
3

Asset Management Industry Trends
Evolution of the
Business Model

Competition

The asset management
environment is rapidly
evolving. Fund managers
must quickly adapt to the
shifting landscape to
position their business for
success.

Scale

Branding

Marketing &
Distribution

•Performance is important, but it is not the only driver of firm value.

•Managers must differentiate their business in terms of product
diversification and edge.

•The importance of scale has never been more apparent, as the major
players in the industry attract the vast majority of asset flows.

•Allocators view many strategies as similar, making it critical for
managers to establish a reputation and increase visibility.

•It takes more than outperformance to attract new capital, yet many asset
managers overlook their firm’s marketing and distribution activities.

Product Development

•Growing the business into a major industry player requires offering
more than just a single product, with diversification being key.

Focus on the Client

•Clients are no longer satisfied with being thrown into a bucket with
other investors. Client relations and customization have become
essential for fund managers.

4

State of the CTA Industry: Stagnant AUM Growth
Many of the metrics used to evaluate the Managed Futures industry are skewed due to the inclusion of
Bridgewater Associates, which is not generally considered a pure CTA. Furthermore, Winton Capital Management
has an overwhelming influence on the industry’s capital flows and AUM trends . Without Bridgewater and
Winton, growth in the CTA industry has been relatively flat over the past few years.
Managed Futures AUM ($B)

Growth of Managed Futures AUM ($B)

Without Bridgewater and
Winton, the Managed
Futures space was
actually down $24B in
AUM from June 2012 to
June 2013.
Managed Futures Quarterly Flow ($B)

Source: Attain Capital
Management

• Removing Bridgewater and Winton
from industry calculations, the
Managed Futures space has barely
grown since 2009. The rest of the
industry only accounted for $23B of
the $125B in new assets raised since
that time.
• Aside from Bridgewater and Winton,
the Managed Futures industry
averaged quarterly outflows of $5B
from Q3 2012 to Q2 2013.
5

State of the CTA Industry: Performance
Barclay CTA Index v. SP 500 (1980 – 2009)

Over long periods of time,
CTA’s have kept pace and
even outperformed the S&P
500. During periods of
market decline such as
2000-02 and 2008, CTA’s
performed exceptionally
well relative to other asset
classes.
The last 3 years have been
challenging for most CTA’s
in terms of performance. In
turn, allocators have
become more dynamic in
attempting to time
allocations to the CTA asset
class, seeking to anticipate
market cycles.

Indexed Performance Comparison (Jan 2011 - Oct 2013)
150
140
130

120
110
100
90
80

Source: Managed Futures
Today, Yahoo! Finance,
Newedge

CTA
*CTA performance calculated using Newedge CTA Index

SP 500

AGG

6

Shifting Institutional Allocation Models
Institutional Core Portfolio Shifting to Include Hedge Fund Strategies

Rather than merely viewing
hedge fund strategies as
satellite allocations,
institutional investors have
been repositioning their
core portfolios to include
certain types of alternatives.
This is a key development
for the CTA industry, as it
enables managers in the
space to compete for a new
pool of capital.

Source: Citi Prime Finance

7

Opportunities in Retail for CTA’s
Liquidity of Alternative Strategies

Managed futures strategies
are naturally among the
most liquid in the
alternatives space. This
provides CTA’s with an
advantage over other
alternative managers in
terms of creating products
for the retail market.
Alternative retail products
in the US are projected to
increase by a CAGR of
nearly 25% over the next
five years. This trend could
generate significant
opportunities for CTA
managers to boost AUM
by targeting an
expanding pool of capital.

Source: Citi Prime Finance,
Morningstar, ICI, Federal
Reserve, Cerulli Associates,
Deloitte

Publicly Offered US Alternative ‘40 Act Mutual Funds and ETFs

8

How the Market Views CTA’s
Pros to Investing in CTA’s
Systematic Trading Models
•
•

Quant-based investment methods
Proprietary algorithms remove emotion from trading decisions

Risk-Adjusted Returns
•
•
•

Generally lower volatility than other asset classes
Smaller drawdowns than equities and bonds on a historical basis
Certain CTA strategies have the potential to generate returns in any market environment

Transparency
•
•

Separately Managed Accounts
Trade activity can be tracked on a daily basis

Reduce Overall Portfolio Risk
•
•
•
•

Increased diversification when combined with traditional asset classes and other alternative
investments
Low-to-negative correlation with equities and bonds
Downside protection
Generally outperform during adverse market conditions for equities and bonds

Tax Advantages
•
•

Profits and losses from futures transactions are neither considered long-term nor short-term in
regard to capital gains
60% of profits are taxed at long-term capital gains rate, 40% taxed at short-term rate

Investor Concerns with CTA’s
•
•
•
•

CTA’s are seen as a black box
Difficult strategy in a zero interest rate environment
Among the highest fees in the industry by strategy
Require volatile or trending markets to produce returns

9

Opportunities for CTA’s
Break Away
from the CTA
Label

•Managers should seek to categorize themselves more broadly as quant-driven
investment firms
•Managed futures are able to play a key role in many portfolios
•In the hedge fund world, CTA’s are seen as an orphan strategy

Integrate New
Strategies

•Expand product offerings
•Participate in markets with broader scope such as equities and ETFs
•Establish product suite with comprehensive set of quant trading
strategies

Broaden
Performance
Cycle

•Leverage systematic trading strategies in markets
other than futures to create products that can perform
in any environment
•Dampen performance volatility between market cycles
•Reduce the time from peak to trough in terms of
overall performance

Customized
Trading
Strategies

•Create bespoke trading models to fit the
specifications of individual clients
•Utilize base systematic platform with
adjustable triggers and parameters

10

Building Value
CTA’S NEED TO FOCUS MORE ATTENTION ON FUNDAMENTAL BUSINESS PRACTICES
Product Manufacturing
•
•
•

Provide strategies and structures to meet the needs of a wide range of investors
Consider capacity constraints
Separately managed accounts, pooled investment vehicles, ‘40 Act products

Operations
•
•

Efficiency of operational structure
Leveragability of systems and personnel

Distribution
•
•

Investors by type and geography
Scalability

GOALS: Develop Tool Set, Expand Distribution Channels, Grow AUM, Improve EBITDA and
Increase Valuation Multiples
Manufacturing

Distribution

Fund Performance

Enterprise
Value

Operational
Efficiency

Firm Structure

11

Getting to the Next Level

Finding a Strategic Partner
•Seek strategic partner(s) with capital and capabilities to assist in
expanding the business
•Major institutions, distributors, fund platforms

Expanding Team
•Firms should add team members with product development and marketing expertise
•Can outsource these roles to third-party advisors and marketers

Publishing Research
•Published research enables a firm to highlight its expertise while facilitating greater understanding of
its capabilities
•By producing client-facing research pieces, managers have the opportunity to create a dialogue with
clients and potential investors

Branding
•Managers need to develop a strong reputation and brand to be competitive
•Create a custom strategy for reaching targeted investors and accessing new markets
•Seek to diversify investor base by type and geography

12

Appendix

13

CTA Fees Remain at the Top
Strategy

Management Fee

Performance Fee

CTA

2.17%

18.90%

Event Driven

1.71%

20.00%

Special Situations

1.71%

20.00%

Distressed Securities

1.70%

19.30%

Credit

1.69%

18.10%

Relative Value

1.67%

16.70%

Macro

1.67%

16.30%

Other

1.63%

18.20%

Multi-Strategy

1.55%

16.60%

Market Neutral

1.53%

18.90%

L/S Equity

1.53%

18.60%

Fixed Income Arbitrage

1.44%

18.30%

Fund of Funds

1.26%

10.60%

Hedge fund fees have been pushed down across the board in recent years,
yet the CTA space has generally maintained pricing power.

Source: Preqin

14

CTA Historical Performance
CTA Index Performance Since 1980
Compound Annual Return

10.36%

Sharpe Ratio

0.38

Worst Drawdown

-15.66%

Correlation vs S&P 500
The S&P 500 and
BarclayHedge CTA Index
both have a total of 7
down years since 1980
(including 2013).
However, the average
down year for the S&P
500 during this time was
-14.69%, while the
average CTA down year
was only -1.29%.

0.01

Correlation vs US Bonds

0.13

Correlation vs World Bonds

0.00

BarclayHedge CTA Index Performance by Year
1990

21.02%

2000

7.86%

2010

7.05%

1981

23.90%

1991

3.73%

2001

0.84%

2011

-3.09%

1982

16.68%

1992

-0.91%

2002

12.36%

2012

-1.70%

1983

23.75%

1993

10.37%

2003

8.69%

2013

-1.41%

8.74%

1994

-0.65%

2004

3.30%

1985

25.50%

1995

13.64%

2005

1.71%

1986

3.82%

1996

9.12%

2006

3.54%

1987

57.27%

1997

10.89%

2007

7.64%

1988

21.76%

1998

7.01%

2008

14.09%

1989

1.80%

1999

-1.19%

2009

-0.10%

CAGR


63.69%

1984

Source: BarclayHedge

1980

23.25%

CAGR

7.09%

CAGR

5.89%

CAGR

0.13%

15

CTA Drawdowns and Volatility
Drawdowns: CTA’s v. S&P 500

While recent
performance has been a
struggle for CTAs, the
asset class continues to
compare favorably to
equities from a risk
perspective. Volatility in
the managed futures
space is significantly
lower than the S&P 500,
and drawdowns have
been considerably less
pronounced within CTA
portfolios.

Source: Preqin Hedge Fund
Analyst

Rolling 3 Year Volatility: CTA’s v. S&P 500

16

Largest CTA Firms
Rank

Firm

AUM ($MM)

Inception

1

$12,500

1987

Transtrend BV

$7,100

1991

Aspect Capital

$5,737

1997

5

Lynx Asset Management

$4,963

1999

6

Informed Portfolio Management (IPM)

$4,558

1998

7

Two Sigma Investments

$4,020

2001

8

Cantab Capital Partners

$3,400

2006

9

P/E Investments

$3,000

1995

10

Campbell & Co.

$2,940

1972

11

Graham Capital Management

$2,619

1994

12

Quantitative Investment Management

$2,187

2003

13

FDO Partners

$2,167

1997

14

H20 Asset Management

$2,001

2010

15

Mesirow Financial

$1,545

2005

16

Eagle Trading Systems

$1,515

2002

17

SEB Asset Selection

$1,394

2003

18

Ikos Asset Management

$1,360

1992

19

Crabel Capital Management

$1,352

1992

20

Millburn Ridgefield Corporation

$1,165

1971

21

Harmonic Capital

$1,112

2002

22

Armajaro Commodities Fund Ltd

$958

1998

23

Ortus Capital Management

$951

2003

24


Man Investments - AHL

4

Source: BarclayHedge, Citi
Prime Finance

1997

3

There are approximately
130 CTA funds above
$200MM in AUM.

$24,700

2

The largest CTA programs
are relatively small from
an AUM perspective when
compared with top
managers in other
segments of the asset
management industry.

Winton Capital Management

Amplitude Capital

$927

2004

25

Boronia Capital

$890

1993

17

Top 20 Hedge Fund Managers: Past and Present
2001
Rank

Firm

2006
Rank

AUM [$M]

1

Moore Capital Mgmt

$8,000

2

Farallon Capital

$7,794

3

Andor Capital Mgmt
Maverick Capital

$7,500

AUM [$M]

1

JPMorgan Asset Mgmt

$33,087

2

Goldman Sachs Asset Mgmt

$32,531

3

Bridgewater Associates

4

5

Citadel Investment Group

$7,150

6

Angelo, Gordon & Co.

$7,000

7

Soros Fund Mgmt

$7,000

Rank

Firm

AUM [$M]

1

Bridgewater Associates

$83,300

2

JPMorgan Asset Mgmt

$54,800

3

Brevan Howard Asset Mgmt $40,000

$30,210

4

BlueCrest Capital Mgmt

$35,300

D.E. Shaw Group

$27,300

5

Och-Ziff Capital Mgmt

$31,900

5

Farallon Capital

$26,200

6

Man Group

$29,600

6

Renaissance Technologies

$26,000

7

Baupost Group

$26,700

7


$21,000

8

BlackRock

$26,635

8

Barclays Global Investors

$18,953

9

Winton Capital Mgmt

$25,700

$7,500

4

Firm

2013

8

Pequot Capital Mgmt

$6,500

9


$6,050

9

Man Investments

$18,800

10

D.E. Shaw & Co.

$23,400

10


$5,570

10

ESL Investments

$17,500

11

Lone Pine Capital

$22,000

11

Caxton Corp.

$5,500

11

GLG Partners

$15,833

11


$22,000

12

Tudor Investment Corp.

$14,850

13

Elliott Mgmt Corp

$21,500

13

Citigroup Alternative Inv.

$14,081

14

Lansdowne Partners

$14,000

14

AQR Capital Mgmt

$20,300

15

Campbell & Co.

$13,600

15

Credit Suisse Hedging-Griffo $19,985

16

Atticus Capital

$13,500

15

GAM

$19,600

17

Viking Global Investors

$19,400

18

Davidson Kempner Capital
Mgmt

$18,590

19

Farallon Capital Mgmt

$18,400

20

Adage Capital Mgmt

$18,360

12

HBK Investments

$5,491

13

Chilton Investment Co.

$5,000

14

Duquesne Capital Mgmt

$5,000

15

ESL Investments

$5,000

16

Highfields Capital Mgmt

$5,000

17

Tudor Investment Corp.

$4,946

18

Highbridge Capital Mgmt

$4,200

19

Perry Capital

$4,137

20

Man Investments

$4,000

17

Caxton Associates

$13,500

18

Citadel Investment Group

$13,400

19

Cerebrus Capital Mgmt

$12,800

20

Moore Capital Mgmt

$12,500

Compare 2001 to 2013. What differences do you notice
in the composition of top managers?

Copyright 2011 MSF Enterprises, LLC

Answer: Single Product v. Diversified Managers

Source: Institutional Investor,
Bloomberg Markets

18

Case Study – AQR
AQR’s Diversified Arbitrage Fund
History
US-based AQR Capital Management is a quant-driven firm, partly owned by Affiliated Managers
Group, offering alternatives and traditional strategies. In January 2009, it became one of the first
hedge fund managers in the U.S. to launch a retail mutual fund, introducing a ‘40 Act version of its
diversified arbitrage strategy. AQR subsequently launched five other ‘40 Act mutual funds, one of
which was alternatives-focused. By the end of 2009, the AQR Diversified Arbitrage Fund had drawn
$236 million in net inflows, the 39th best launch among 510 new funds introduced in the U.S.
during the year.
Strategy
AQR undertook this effort by hiring personnel with retail mutual fund experience to lead the sales
effort, including a wholesale distribution force that had experience with both alternatives and
mutual fund wholesaling. Importantly, the firm put compliance structures in place to eliminate
potential conflicts arising from the same portfolio managers running the ‘40 Act and hedge fund
versions of the arbitrage strategy. Of course, AQR already had the trading infrastructure used for
managing a complex mix of arbitrage strategies, including convertible arb and merger arb, which
can have 250+ long positions and 150+ short positions, and deploy leverage.
The AQR Diversified Arbitrage Fund capped its fees at 1.5% for the retail share class, but the real
key was educating advisors about the product. The firm targeted sophisticated RIAs, mutual fund
wrap platforms, and broker-dealer due diligence/ gatekeeper departments that had familiarity with
alternatives. AQR found a number of firms that already used alternatives in a limited partnership
format and were looking to offer alternative strategies to a broader spectrum of investors via the
’40 Act structure.
Lessons
Education continues to be a priority, to both explain that the low-correlated strategy still carries
risk and to help advisors understand how the Diversified Arbitrage Fund fits best into portfolios.
The educational effort appears to be working. For example, Litman/Gregory Advisor Intelligence,
an investment research and due diligence service for independent RIAs, added the AQR Diversified
Arbitrage Fund to its Approved List. In January 2010, AQR launched its second retail alternative
fund, the AQR Managed Futures Strategy Fund, which had $71 million in assets two months later.

19

MSF Firm Capabilities

20

Our Value
“Creating a Strategic Plan”
OUR GOAL
1.
2.
3.
4.
5.

Increase Profitability
Create Brand Strategy
Product Development
Raise AUM
Maximize Firm Value

WHAT WE DO
1.
2.
3.

Create strategy to leverage existing resources and maximize
profitability
Align professional goals of the organization with personal
aspirations of the business owners
Provide a road map with clearly defined and measurable steps for
execution

21

Our Services
Mergers and Acquisitions: We advise domestic and international companies with
individually tailored M&A advice and work to help them accomplish their goals. We structure,
execute and evaluate mergers and acquisitions, joint ventures, strategic alliances and
divestitures in various industries and countries. We have successful track records of managing
all aspects of complex investment projects.

Capital Raising: MSF bankers are experienced in all aspects of capital formation, including
senior debt, subordinated debt, mezzanine capital, preferred stock and common stock. We
maintain an ongoing dialogue with institutional sources of capital, including commercial banks,
insurance companies, pension funds, finance companies, hedge funds, mezzanine funds, venture
capital funds and private equity groups.

Strategic Advisory: MSF’s strategic advisory practice focuses on identifying and executing
strategies to maximize value and create aligned objectives. MSF bankers construct different
transaction strategies – including acquisitions, divestitures, recapitalizations and outright sales
– and evaluate how each strategy impacts shareholder interests. Our analysis is based on solid
research, as well as first-hand experience with the current transactional environment.

22

MSF Team
Michael Fields │ Founder & Managing Partner
Michael has spent the past 25 years in the capital markets focusing on alternative
investments as a banker, allocator, analyst and placement agent. During this time, he has
raised more than $750MM for alternative investment managers including hedge funds,
funds of funds, private equity groups and venture capital firms. Prior to founding MSF,
Michael was Director of Research for European Markets at Lighthouse Partners, a $7.9B
fund of funds. Before Lighthouse, Mr. Fields worked as a Portfolio Analyst in the risk
arbitrage department at Tiedemann Investment Group, a $2B family of hedge fund
strategies. Mr. Fields came to Tiedemann from Computer Trading Corporation LP, a
commodity-trading advisor launched from the Tudor Investment Corp. At CTC, Mr. Fields
was on the team in charge of Asian portfolio investments. Mr. Fields has a Bachelor of Arts
degree from Hobart & Williams Smith Colleges and received his MBA in Finance &
International Business from Fordham University. Michael holds Series 7 & 63 licenses.
Dan Urmann│ Chief Operating Officer
Dan brings more than 17 years of experience as an executive-level business leader, having
worked with a diverse group of privately-held companies from industries such as
information technology, consumer products, real estate and financial services. Prior to MSF,
Dan served as an entrepreneur and marketing strategist for several start-ups and early
stage growth companies. He also served as Director of Business Development for Streaming
Media Corporation, an early-stage venture-funded technology firm that was sold in 2006 for
$155MM. He began his career in finance with Century Capital Group, a middle-market
investment bank focusing on technology, healthcare, retail, construction, ready-mix concrete
and real estate. Dan holds a BSBA Management and MBA from the University of Denver.
23

Contact

MSF ENTERPRISES, LLC
717 17th St., Suite 2160
Denver, CO 80202

MICHAEL FIELDS
(303) 847-4649
mfields@msfenterprises.com

DISCLAIMER: Securities are offered through Silver Leaf Partners, a member of FINRA, NFA, & SIPC. This communication is for informational purposes only. The information
above is not guaranteed as to its accuracy or completeness. If such information is related to a security or product then you are further advised that we do not provide investment
counsel thereon nor do we certify such information as complete or accurate. To determine suitability, you must secure, read & understood all relevant information related thereto,
conduct a thorough due diligence & seek expert independent counsel, if necessary, prior to investing. We further caution that past performance is not indicative of future results.
This communication is confidential & may not be disclosed without permission. If this email is not intended for you, then you have received it in error & you may not distribute or
copy it; please let us know of our error by reply email & delete this message & all of its attachments. Every effort is made to keep our network virus free; we have no liability for
any damage caused by this transmission.

24

Opportunities in the CTA Industry

Recomendados

Recomendados

Más contenido relacionado

La actualidad más candente

La actualidad más candente (20)

Destacado

Destacado (6)

Similar a Opportunities in the CTA Industry

Similar a Opportunities in the CTA Industry (20)

Último

Último (20)

Opportunities in the CTA Industry