While the cost of doing business is increasing, Gerlach comments that institutional investors are seeking to reduce fees, often in exchange for longer lock-up periods or larger investment commitments. He also appreciates the long-term commitment and more sophisticated discussion with institutional investors.
However, the environment of quantitative easing and reduction of market volatility has challenged CTAs the last three years. But this is the environment that can favor discretionary macro managers. Rather than redeeming from CTAs for earning lower profits than equity markets, institutions are maintaining their CTA investments while diversifying their exposure with discretionary managers.
Finally, Gerlach notes that changes in the regulatory environment are causing uncertainty for both managers and investors. Dodd-Frank in the United States and the ever-evolving UCITS regulations in Europe are raising questions about what strategies are allowed in the new regime. Specifically, investors are concerned about position limits on energy, metals and agricultural commodities, and whether those trades have different tax or regulatory status than trades in financial futures. With the rise of ETFs and 40 Act funds in the United States, managers are modifying fee structures, as incentive fees are an area of concern within the 40 Act regulatory regime.
The bottom line is CTAs are getting a new-found respect after 2008 and 2009, even though outperformance in down markets has a strong historical precedent for these managers. The ability to provide liquidity in any type of market, and the willingness to offer managed accounts where investors keep the custody of their assets, are increasingly prized by investors in this (hopefully) post-crisis era. The next time someone tells you that “in a crisis, all correlations move toward one,” please remind them that there is an underappreciated asset class that has historically provided value in a down market. Your friendly neighborhood managed futures manager will thank you for the referral.
Keith H. Black, PhD, CFA, is the director of curriculum for the Chartered Alternative Investment Analyst (CAIA) Association.