Are CTAs broken?

The Newedge CTA index has returned a disappointing 0.82% per annum over the past five years.[1] Many explanations have been given, including the lack of a trending market. This explanation implies that, as markets normalize, CTA performance should revert to higher historical levels – the 6%+ per annum realized in the five years preceding the crisis.

However, this analysis ignores the role of LIBOR in managed futures portfolios: CTAs earn a return on investor cash posted as margin for futures positions. Consequently, an evaluation of CTA returns should account for Libor.

Viewedi on an annual basis, the impact of Libor on pre-crisis returns is strikingly clear:

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