- CTAs have benefited from the strengthening of the dollar and a spike in commodities.
- These hedge funds are up 21.7% so far this year, outperforming other strategies.
- Three CTA managers shared what strategies they are looking to build out in the near future.
Trend-following hedge funds are using this year’s success to create and push out more strategies and products.
CTAs, or commodity trading advisors, have seen a surge in performance this year, thanks to trends like the strengthening of the dollar and a spike in commodity prices.
These hedge funds typically use computer-based models to make trades on futures contracts based on other market patterns. They go long markets going up and short markets that are going down, but they differ in the asset classes or timelines they might invest in or how much leverage they use.
CTAs have brought in over $4.9 billion in net inflows over the 12 months ending in June, a Barclay Fund Flow Indicator report published in August said.
CTAs were up by more than 21% for the year ending on Wednesday, according to Societe Generale’s prime-brokerage unit. They’re outperforming most hedge-fund strategies — the industry on average has lost 2.7% through the end of July, according to Hedge Fund Research.
Insider previously highlighted eight CTA managers outperforming the market in August. We sat down with three of those managers who shared what has worked so far this year for them and the opportunities they are eyeing for the future.
Quest Partners, founded by Nigol Koulajian in March 2001, was up 24.5% year to date through August 19, according to a source familiar with the fund’s performance.
The firm tapped Mike Harris to serve as president of the firm three months ago to handle the day-to-day operations of the hedge fund.
The portfolio trades across North America, Asia, and Europe, which has helped the portfolio’s performance because of the policy differences between central banks like the Federal Reserve and the Bank of Japan.
“This divergence in central bank monetary policy creates opportunities to trade the relative value between these two countries in their fixed-income and currency markets,” Harris said. “This year, one of the more popular trades was to be long US dollar vs. the Japanese yen to take advantage of this new foreign exchange carry trade as investors tend to seek out higher-yielding markets to invest in, which propels the currency higher.”
In a carry trade, investors borrow in a currency with ultralow interest rates, like the yen, and invest in assets denominated in a currency where rates are expected to rise, like the dollar.
For the near future, the firm is looking to add to the capacity of its flagship AQO strategy, Harris told Insider. Harris and the Quest team are also focused on developing other systematic strategies like quantitative macro, which looks at the relative-value relationship between markets.
Quest is also currently researching quantitative equities: That’s when a book of long and short positions is traded in single-name stocks.
“The benefit of this strategy is its low correlation with directional equity beta since it maintains market neutrality,” Harris said. “We have already begun trading this portfolio at a small allocation of capital and it is showing promise. Who knows, maybe it could even be launched as a standalone portfolio one day.”
The firm’s DL One fund generated a 5.1% return at the end of July and a 31.2% return year to date through the end of July, according to Institutional Advisory Services Group, which has a CTA database. Its DL Two fund was up 7.8% for July and up 8.6% year to date.
Rosetta Analytics was founded in 2016 by Julia Bonafede, who was previously the president of Wilshire Consulting, and Angelo Calvello, an Institutional Investor columnist.
The firm is close to launching a bitcoin strategy, which has been tested over the past few months. Bonafede said it is doing well relative to the bitcoin market. The firm is also in the process of testing an ethereum strategy.
Bitcoin and ethereum ”are going through large transformations, and we’re in the middle of it,” she said, noting the massive drop in value within cryptocurrencies over the past few months.
“We’ve always been interested in this new market that’s developing,” she said. “The markets are very inefficient and obviously you have to be careful because there’s been fraud and it’s not regulated. So it’s really the Wild West.”
But Rosetta Analytics’ models are built to thrive during volatile markets, Bonafede said.
“We’re always looking for areas in the market that we think we can potentially earn alpha for clients,” she said.
Dunn Capital Management
Dunn Capital Management’s latest monthly performance report said its $753 million World Monetary and Agriculture Program was up 37.8% year to date at the end of July. The firm said it was up 10% for the month as of August 23.
The firm plans to branch out into other areas beyond trend-following and commodities strategies, Martin Bergin, president of Dunn Capital, said. For example, the firm is close to launching a volatility program based in Europe and is working on a long-only volatility program in-house, which can work as a hedge against long-equity positions, he told Insider.
Dunn Capital is one of the few funds that does not charge a management fee — most managers charge between 1% and 2% of the fund’s net assets and is typically charged on a monthly or quarterly basis — and only makes money when their clients reach new highs.
On the trend-following side, “we’re always working in there to determine portfolio development and risk management, which we see as the two areas with the most value to be added,” Bergin said.
“At some point we want to diversify Dunn and make it more robust just like the systems we designed,” he said.