A mature portfolio of asset allocation must have both those responsible for offense and those responsible for defense. In the current situation of widespread allocation, and even high-allocation stock long strategy, CTA strategies with defensive value have gradually attracted the attention of high-net-worth customers.
The underlying asset of the CTA strategy is commodity futures, which have a low correlation with common stock and debt assets. Adding a CTA strategy to an asset allocation portfolio can play a good role in diversifying risk and can also provide a unique crisis protection role when the black swan comes.
<h1 class="pgc-h-arrow-right" data-track="6" > stagflation expectations are getting stronger and risk aversion is heating up</h1>
The current macro environment facing A-shares is very complex. On the one hand, the leading indicators of the economy have fallen below the tipping point, indicating that future economic growth may face challenges; on the other hand, the international energy crisis is in full swing, and the winter of 2021 may be the most expensive winter ever.
According to the National Bureau of Statistics, China's manufacturing purchasing managers' index (PMI) was 49.6% in September, 0.5 percentage points lower than the previous month and fell below the tipping point. This is the first time since March 2020 that the manufacturing PMI has fallen below the boom-bust line.
PMI is one of the leading indexes for monitoring macroeconomic trends in the world, and has a strong predictive and early warning effect. When the PMI is above 50%, the economy is in an expansion cycle; below 50% it is in the contraction range.
It is worth noting that the manufacturing PMI index has shown a downward trend since March this year, and under the influence of dual control of energy consumption and rising raw material and maritime prices, the downward trend of manufacturing PMI has accelerated after the third quarter.
Source: National Statistical Office
Another data that reflects the economic outlook is household consumption. In August, the total retail sales of consumer goods fell by 6 percentage points month-on-month, an increase of only 2.5% year-on-year, and a two-year compound growth rate of 1.5%. The domestic tourism trips of the just announced National Day holiday were 515 million person-times, a year-on-year decrease of 1.5% on a comparable basis, and recovered to 70.1% of the same period before the epidemic. Achieved domestic tourism revenue of 389.061 billion yuan, a year-on-year decrease of 4.7%, recovering to 59.9% of the same period before the epidemic. The recovery of tourism revenue has been slower than the recovery of travel trips, indicating that residents are not willing to spend.
Although the recovery has slowed, global inflation has accelerated upwards. Citi's Global Inflation Surprise Index surged to its highest level on record since 1999, suggesting that inflation is currently higher than expected.
Figure 2 - Citi Global Inflation Surprise Index
Source: Zerohedge
Rising energy prices and rising inflation have cast a shadow over the global economic outlook, with "stagflation" becoming a central term influencing current trading sentiment. In the stagflation environment, the cost of enterprises continues to rise, but the demand is not enough to support enterprises to raise prices, resulting in a decline in corporate profit margins, which is the reason why the stock market performance in the stagflation environment is often weak.
While the market has yet to agree on the stagflation, investors are better off responding in advance. The CTA strategy of investing in the futures market can help investors hedge against stagflation across assets.
<h1 class="pgc-h-arrow-right" data-track="50" > the configuration value of the Crisis Alpha:CTA strategy</h1>
CTA strategy is also known as "managed futures strategy", because the futures market can be long or short, but also can be T+0 trading, so as long as the market volatility exists, CTA strategy in all kinds of market environments can pursue absolute returns.
Quantitative CTA is based on trend following strategies, through a variety of quantitative indicators to determine whether a futures variety is in an ascending or descending channel, so as to follow the trend to do long and short. As macroeconomic inflation has risen this year, leading to an increase in volatility in assets such as commodities, the performance of the CTA strategy is worth looking forward to.
(1) The source of income is independent, which can reduce the volatility of the portfolio
The CTA strategy takes advantage of the rising or falling trend of futures market prices to make money that fluctuates in the futures market. Through the trend following method, it mainly invests in domestic financial futures and commodity futures, including stock index futures, agricultural futures, metal futures, energy futures, treasury bond futures, etc. The revenue stream of a CTA strategy determines that it has a low correlation with other strategies.
The Chicago Mercantile Exchange, which has structured its portfolio in its research report, argues that after joining the CTA strategy, the original equity-debt portfolio is significantly less volatile than the original portfolio, but the returns have been enhanced.
After the big year of the equity market in 2020, a large number of investors have allocated equity funds and have high positions, so it is a wise choice to join the CTA strategy to optimize the portfolio.
(2) Crisis Alpha
Historically, CTA strategies have tended to provide good downside protection in the event of a black swan in the stock and bond markets, the so-called "crisis Alpha.".
For now, the U.S. federal debt problem has been postponed to December but not completely resolved, the risk of U.S. Debt default remains, and soaring inflation could force the Fed to raise interest rates early. Although the probability is extremely low, once the black swan flies out, the US Treasury yield will soar, then the global market will face a double kill of equity and debt, repeating the big drawdown in February this year.
When there is a crisis in traditional stocks and debt assets, capital will flow into other assets such as commodities and foreign exchange. The investment target of the CTA strategy is the futures market, which can better capture the profit opportunities of this type of market, which is also known as crisis Alpha.
Adding a CTA strategy to the asset allocation portfolio is equivalent to putting eggs in multiple baskets, which can reduce the volatility of the portfolio and improve the risk-reward ratio, which is an important part of asset allocation.
<h1 class="pgc-h-arrow-right" data-track="51" > the risk and benefit of the CTA strategy</h1>
CTA strategies invest in the futures market, and the risk of futures trading has two main aspects: one is the risk of futures price fluctuations; the other is the risk that futures margin trading may cause.
We know that futures trading is in the form of margin trading, which has a large leverage. The head CTA manager usually strictly controls the margin ratio, but some managers will increase the margin ratio in order to win higher returns, and the corresponding risk will also be greatly increased.
In general, in order to control risk, CTA strategies use margin accounting for about 20%. For example, a 50 million CTA product, of which 10 million is used for margin trading (margin ratio is 20%), and the remaining 40 million is used for cash management. Professional managers will set up risk control measures such as early warning lines and stop loss lines, which are more disciplined and thus better control risks.
For the remaining 80% of the funds, if only the money fund is purchased for cash management, the utilization rate of the funds will be relatively low. Therefore, most managers will adopt hybrid strategies, such as matching index enhancement strategies and offline new strategies, to improve the overall strategy yield.
On the whole, economic uncertainty has increased, expectations of future stagnation have gradually strengthened, and market risk aversion has heated up. At such times, the portfolio needs to allocate a part of the defensive strategy such as CTA, thereby reducing the overall risk level of the portfolio and optimizing the overall return of the portfolio.
The above views, analyses and forecasts, opinions are only analysis and judgment under specific market conditions and/or based on certain assumptions, do not mean suitable for all situations, do not constitute any form of investment advice or income guarantee for any person, the above is only the author's views and opinions, does not represent the position and opinion of the platform. The specific product information is subject to the product contract, investors must carefully read the product contract, risk disclosure and other legal documents, pay attention to product investment risks and loss risks, the market is risky, investment needs to be cautious.