Group launches ETF based on CTA performance

RBS Global Banking & Markets (“GBM”) has launched the world’s first Exchange Traded Fund (“ETF”) that tracks the performance of an underlying index exclusively made up of CTA managers.1 Called the “RBS Market Access CTA Index ETF”, it will trade on the Deutsche Börse in Frankfurt, Germany.

This latest ETF from RBS provides exposure to a well-diversified pool of CTA managers, including some of the world’s biggest CTA names, together with market specialists and smaller managers.

“We listened to our clients’ needs and forged the right partnerships within the CTA industry to deliver our new range of CTA-linked indices,” says David Moroney, Global Head of Retail Structuring and Structured Funds, and Pieter Dalderop, Head of Fund Derivatives.

“We are proud to provide professional investors access to a well-diversified pool of CTA managers through an ETF. This will strengthen RBS’s positioning as a market innovator in ETFs,” adds Andrea Sozzi Sabatini, Head of Equities and Structured Retail Sales, EMEA & LatAm.

The new RBS Market Access CTA Index ETF tracks the performance of the “RBS CTA Index”, which allocates an equal weighting to the “RBS Discretionary CTA Index” (consisting of CTAs who specifically select their investments by using a “discretionary” trading strategy) and the “RBS Systematic CTA Index” (consisting of CTAs using mathematical models to execute a “systematic” trading strategy).

In turn, the RBS Discretionary CTA Index and the RBS Systematic CTA Index (the “Constituent Indices”) allocate a weighting to their constituent CTAs based on their relative performance, volatility and correlations, rather than their name or reputation playing any role. In this way, so-called “blue chip” bias is avoided.

Each month, the RBS CTA Index is rebalanced to a 50:50 weighting between the Constituent Indices. They themselves are also reweighted, taking into account the most recent performance of the underlying CTAs, thereby maximising as much as possible investor returns. Since June 2007, the RBS CTA Index has produced an annualised return of 10.1% with an annualised volatility of 7.4%, according to backtested data.2

Significantly, the average correlation between the constituent CTAs is 28%, below the threshold of 30% that is generally considered by the hedge fund industry to be uncorrelated. In this way, professional investors automatically diversify their investment risk when they buy units in the RBS Market Access CTA Index ETF (denominated at US$1000 per unit).

The benefits of this new CTA-linked ETF may be significant: Since 2001, the one-year rolling correlation of CTAs to global equities (MSCI World Index) rose in rising equity markets and quickly dropped in falling markets.2

Between June and December 2008, for example – the period during which global equities lost 44.7% of their value2 – the one-year rolling correlation between CTAs and global equities dropped by 71.4%,2 thereby demonstrating the strength of CTAs as an investment. Combining assets in an investment portfolio whose returns show low or even negative correlation to each other is a way of minimising investment risk while maximising returns. This attractive correlation level, combined with good historical returns, has been one of the reasons for substantial capital inflows into CTAs in recent years.

On an ongoing basis, RBS GBM carries out due diligence on the underlying CTA managers as a means of monitoring risk on behalf of the investor. The fact that the RBS Market Access CTA Index ETF is UCITS IV-compliant and is set to trade on the Deutsche Börse also means this latest product from RBS GBM is transparent and regulated.

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