Why invest in a futures strategy?

A CTA strategy mainly uses futures to invest in a wide range of financial assets, including equity indices, short-term and long-term interest rates, currencies, and commodities. CTA strategies take a quantitative approach to detect and exploit both upward and downward trends on these various markets.

A good CTA strategy must offer a portfolio the additional returns needed, particularly during market slumps, in order to enhance its robustness and limit its volatility. To accomplish this, each CTA manager has his own style. To maximise yields while limiting losses, it is important to be fully diversified in order to tap into various market configurations – diversified in asset classes traded, diversified in time horizons to detect trends, and diversified in the quantitative models used. As long as there is a trend, its direction hardly matters; the important thing is to detect this trend and to make best use of it, as this is exactly what is needed to offer returns to investors when they need them the most.

What are your strategy’s performance drivers and their advantages for investors?

We have developed a quantitative method that analyses the most liquid futures markets on a constant basis, both to detect their main trends and to capture shorter-term shifts. Our main performance driver, trend-following, comes with two complementary short-term strategies. While trend-following strategies help capture wide-amplitude swings, our shape recognition and contrarian strategies help capture short term oscillations. We are investing in 36 of the most liquid futures contracts across four asset classes[1], including equities, interest rates, currencies, and bonds, and our risk-management algorithms equally weight the risk between asset classes thus offering efficient diversification at all times. Final returns are based on the accumulation of various positions taken by our models, whether bullish or bearish. They are designed to be decorrelated from traditional asset classes, which offers an edge to any investor seeking diversification.

How does your management strategy stand out?

Our approach stands out in many ways, starting with the objective we set ourselves more than 10 years ago when we developed our strategies. We wanted to offer investors a product that could tap into the main trends while offering greater robustness than a trend-following strategy alone.

To do so, we have made diversification the key to our management process. Trend-following strategies are applied to a wide range of horizons (from six weeks to 12 months) and account for 70% of the risk budget at any point in time, while contrarian and shape-recognition strategies, which are used to capture shorter-term trends, each account for 15% of our risk budget[2].

We have also focused on risk management and diversification between asset classes. In practical terms, weighting our risk budget equally among four different asset classes and 36 underlying futures contracts[3] gives us equal exposures to trends, regardless of the markets in which they develop.

In terms of risk management, our system allows us to be especially responsive when market risk increases.

Since 2006, these choices and our returns have helped us stand out, as they have allowed us to outperform the CTA indices[4], particularly when trend-following strategies have encountered less favourable environments.

Why invest today in your strategy?

As our strategy is only loosely correlated to the markets, we don’t believe there is any particular time to invest in our strategy. Since the launch of the strategy, we have posted a performance disconnected from traditional asset classes and other alternative strategies, with a volatility profile around 10%[5]. Our strategy has historically shown a positive performance in phases of market stress (e.g. 2008 global financial crisis, recessionary fears in 2018, Covid in 2020, inflation and war in Ukraine in 2022)[6], as these phases naturally provide very clear and easily identifiable trends. This allows us to make a positive contribution to our clients’ portfolios when they most need it. Adding this type of strategy to a diversified equity and bond portfolio has historically[7] helped enhance quality and performance by reducing volatility and drawdown of the overall portfolio.

But aren’t some market environments more favourable than others?

Our main strategy is to tap into major trends. A favourable environment consists of several trends that are loosely correlated among themselves and that last for several months. When the markets move sideways or suffer sudden “risk-on risk-off”[8] shifts, our contrarian and shaperecognition strategies are able to take advantage of it, whereas the trend-following strategy (our main performance driver) will lack opportunities. The robustness of our approach is based, among other things, on the complementarity and low correlation between our strategies.

Our studies[9] show that trend-following strategies work best beyond a certain level of volatility, which remains relatively high today, fuelled by geopolitical and macroeconomic uncertainties.