Thread by @mikeharrisNY

Thread 🧵 CTAs are having a good year so far with Top 50 +12.8% YTD, according to BarclayHedge. But let's not forget that from 2004 to 2021, top 20 CTAs returned about 2.5% on the average.

"But, but, but, convexity, alternatives, etc." #commodities #CTA #trading $SPX

This is another form of tail risk hedging but with higher intrinsic risk than using other tail risk protection method. The 80s and 90s aren't coming back, when CTAs using TF discipline profited from naïve TA traders in commodity futures. Nowadays there are no such fools en masse.

CTAs nowadays are the parties who assume hedging risk of producers. Producers have become way more sophisticated then in 80s and 90s. They won't pay fortunes to hedge when they are the ones who know the market direction. The game for CTAs is difficult.

I won't be surprised if they give back most of their profits from this year when commodity trends reverse. Mathematically, this is one problem: In the distant past, there was serial correlation in commodity returns. That changed in the last 20 years.

As Jim Simons explained well, people used a 20-day sma and due to positive serial correlation they profited. priceactionlab.com/Blog/2015/09/j…

After serial correlation turned negative, CTAs started using breakouts, or increased the ma periods. As any trader with SITG knows, slow moving averages have long lags and when trends reverse, they are slow to adapt.

Then CTAs started using convoluted positions size schemes based on volatility and that further made the systems vulnerable to market swings and sudden crashes in volatility. The performance numbers for top 20 from 2004 to 2021 speak for themselves.

IMO, the golden era of CTAs is long over. There are now other more efficient schemes for equity investors to buy convexity using options and other tools. Options are hard and there is a natural barrier to entry. CTAs and TF have no barrier to entry but fewer counter-parties.