CTAs exposures analysis provide valuable risk metrics, but have rarely been an efficient allocation decision tool

Tracking CTAs’ exposures to figure out whether they match one’s fundamental view and/or how they fit in one’s diversified allocation may provide a useful instant map of risks. However, using CTAs exposures as an allocation decision tool has rarely been a reliable method – unless full position transparency is available on an on-going basis.

First, CTAs’ exposures change frequently. Past CTAs performance reflects maturing trends that are usually closer to their end than to their beginning. This approach also tends to ignore trends that are emerging but not yet significantly contributing to performance. On average, asset trends last about 50 days and CTAs’ reaction function tends to be inversely correlated to volatility, meaning that CTAs models will rapidly adjust during volatility spikes.

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