Study: Institutional Investors Allocate to CTAs

Institutional investors are increasingly flocking to commodity trading advisers (CTAs), according to Don Steinbrugge of Agecroft Partners.

The number of pension plans allocating to hedge funds has increased over the past decade, along with the percent of their average portfolio allocation. However, CTAs – which commonly advice investors on the use of future contracts — have only recently been accepted as a core hedge fund allocation among schemes to lower volatility, according to Agecroft. “Investment committees were shocked when they received their 2008 year end performance report which showed correlations of performance between their managers had risen significantly,” the company said in a release.

The California Public Employees’ Retirement System (CalPERS) along with the Fairfax Country Retirement System, City of Fort Worth Employees’ Retirement Fund, State of Wyoming Retirement System, San Diego County Employees Retirement Association, Texas Teachers Retirement System, New Jersey Public Employees’ Retirement System, and Eastman Kodak Co. have embraced this strategy, actively investing in CTA managers, an industry source told aiCIO.

One reason for the possible uptick in CTA adoption: Following the Bernie Madoff fraud and other scandals that pushed investors to enhance their due diligence processes across all types of asset classes and sub-classes. Also, according to Steinbrugge, after the fourth quarter of 2008, pension funds realized that their portfolios were not as diversified as they previously believed. As a result, they have placed higher importance on liquidity, transparency and risk management, making CTAs more popular, according to the firm.

The rationale for institutional investors historically avoiding CTAs, according to Agecroft, was due to a lack of understanding of how systematic models worked. “CTAs have come a long way over the past two years in gaining credibility with institutional investors. These investors have been drawn to their historically uncorrelated return streams with long-only benchmarks, the institutional structure of the leading firms in the strategy, the high level of liquidity in the underlining investments, fund terms, ease of creating a separate account, and, most importantly, strong historical performance,” said Steinbrugge.