Summary

With the onset of the inflationary cycle and the change in central bank monetary policy, markets have entered a new paradigm, leaving investors uncertain as to the direction that markets will take next, and the timing of the transition into the next phase of the economic cycle. 

The merits of CTA (Commodity Trading Advisors) strategies in periods of crisis/ recession are often touted: decorrelation from the main asset classes, resilience of performance even in times of crisis, reduction of volatility and drawdowns when added to a balanced portfolio. Do these qualities hold true in all phases of the business cycle? 

Although trend-following strategies are based on mathematical modelling, they are not disconnected from economic activity. Macro factors are part of their performance drivers. So can CTAs be considered “economically rational”? 

To verify this, we have analyzed their behavior in the various phases of the cycle: recovery, expansion, peak and recession. We came up with the following observations: 

• CTAs deliver positive performance in all phases of the cycle. 

• Adding them to a traditional 60/40 balanced portfolio is a performance enhancer in all phases of the cycle except the expansion phase - in which no asset class outperforms equities. 

• If we extend the analysis to risk-adjusted returns, the positive contribution of CTAs is observed in all phases: the risk/return profile of the balanced portfolio is improved in all periods under review. 

In view of these factors, it seems clear to us that investors, even when plunged into uncertainty about the position in the economic cycle and the direction the markets will take, will generally be well advised to include a CTA allocation in their portfolio. 

Read more via the link:  2023_06_cta-business-cycles_gb.pdf (candriam.com)