Podcast Summary: Top Traders Unplugged – Episode SI339: CTAs vs ETFs: The Showdown That Could Change Everything

Host: Niels Kaastrup-Larsen
Guests: Andrew Beer and Tom Wrobel
Release Date: March 15, 2025
Duration: Approximately 80 minutes
Access Link: Top Traders Unplugged

Introduction

In episode SI339 of Top Traders Unplugged, host Niels Kaastrup-Larsen engages in an in-depth discussion with seasoned experts Andrew Beer and Tom Wrobel. The central theme revolves around the evolving landscape of systematic investing, specifically comparing Commodity Trading Advisors (CTAs) with the burgeoning ETF (Exchange-Traded Fund) market. The conversation delves into market volatility, trend following strategies, portfolio diversification, and the impact of new financial products introduced by major firms like BlackRock and Fidelity.

1. Current Market Environment and Geopolitical Influences

Tom Robel kickstarts the discussion by highlighting the unprecedented volatility in the current administration, drawing parallels with historical political shifts:

[00:46] Tom Robel: "The attitude of all these people is to figure out how much you can actually stress the system. Whatever people thought, you’ve got to stretch the tails out. And it's going to be an unbelievable ride from here. Good or bad, volatility is here."

The conversation underscores how geopolitical events, such as the Ukraine crisis and potential U.S. economic stagflation, are creating an unpredictable investment environment. Tom emphasizes the shift in U.S. global economic influence and the implications of tariff policies on commodities and international trade.

Andrew Beer adds perspective on the impact of strong equity markets over the past 15 years, noting:

[04:14] Andrew Beer: "Bridgewater was out with a paper saying the last 15 years have been the best since 1970. No other 15-year period where equities have done so well."

He points out that the dominance of equities makes it challenging for investors to diversify outside the equity market, especially when such equities have been performing exceptionally well.

2. Trend Following and CTAs Performance Update

Andrew Beer introduces the discussion on trend following by sharing personal metrics:

[06:56] Andrew Beer: "Last night my own trend barometer finished at 57. That's a pretty good reading."

Tom Robel provides a detailed performance review of various CTA indices:

[08:11] Tom Robel: "The flagship SGCTA index is currently down just over two and a half percent for the year, with the trend index down nearly four and a half percent."

Tom explains the performance dynamics of different CTA strategies, noting that increased volatility could offer opportunities for trend followers to capture emerging trends despite a challenging start to the year.

Andrew Beer observes a 2% difference in average annual returns between the broader and trend indices over five years:

[08:43] Andrew Beer: "The trend index had done somewhat better over the last five years than the broader index with a 2% average annual return difference."

Tom Robel discusses the replication of indices and the inherent leverage involved:

[10:15] Tom Robel: "Statistically, they have a 98% correlation and the trend is like a 1.2, 1.3 version of the other. So it's almost all of the performance differential you're prescribing is essentially leverage."

The duo examines the challenges and benefits of replicating CTA indices, emphasizing the high correlation and the role of leverage in performance differences.

3. Portfolio Construction and Diversification Strategies

The conversation shifts to portfolio diversification, with Tom Robel advocating for CTAs as essential diversifiers:

[25:14] Tom Robel: "Can investors hold onto these diversifiers... and can they actually hold onto it for long enough to benefit from the upside that they can generate in the portfolio?"

Andrew Beer reflects on the historical integration of managed futures with equities, suggesting that current products often bundle CTAs with equity indices to provide diversification without sacrificing the growth from equities:

[27:40] Andrew Beer: "Creating these products makes perfect sense for a diversification perspective."

Tom Robel further explores the concept of portable alpha, where CTAs overlay traditional assets to enhance returns without displacing the core equity investment:

[32:18] Tom Robel: "Portable alpha through the efficiencies you can get through derivative strategies allows you to have the equities plus an extra allocation to a diversifier on top."

The discussion emphasizes balancing risk and reward by integrating CTAs to protect against downside risks while capturing potential upside in volatile markets.

4. Managed Futures ETFs vs Traditional CTAs

A significant portion of the episode is dedicated to examining the rise of Managed Futures ETFs launched by major firms like BlackRock and Fidelity, and their potential impact on traditional CTA and hedge fund models.

Tom Robel expresses skepticism about the threat posed by these new ETFs:

[58:48] Tom Robel: "The managed futures ETF space is $3 billion, compared to the $330-$340 billion in the broader space. BlackRock's entry, priced at 80 basis points, isn’t cheap relative to QIS products."

He argues that ETFs are unlikely to cannibalize the established CTA market as their primary investors are typically different—often those not already invested in hedge funds.

Andrew Beer concurs, emphasizing the importance of track records and expertise over the allure of lower fees offered by ETFs:

[63:21] Andrew Beer: "I would still argue that the old God that are probably represented in your indices and replicated by Andrew...have something to it. I would always choose someone who has experience over someone who just has size."

Tom Robel highlights the challenges and occasional failures of large firms like BlackRock when entering the CTA space:

[64:52] Tom Robel: "BlackRock launched the Style Advantage Fund expecting 6% return with a 6% standard deviation, but it went down 35%. It’s an absolute crapshoot whether they’ll get it right or not."

The guests agree that while Managed Futures ETFs add accessibility, they do not currently pose a significant threat to traditional CTAs due to differences in investor base, fees, and the proven expertise of established managers.

5. Evolution and Innovation in CTA Strategies

The discussion transitions to the ongoing evolution of CTA strategies, focusing on the incorporation of regime identification and multiple model time frames to adapt to changing market conditions.

Tom Robel explains the necessity of diversification within CTA models to handle different market regimes:

[35:16] Tom Robel: "We've seen CTAs employ many more models and use methodologies to allocate risk across different model sets, allowing them to adapt more effectively."

Andrew Beer raises concerns about the feasibility of accurately predicting market regimes, citing past instances where sudden shifts defied model predictions:

[36:21] Andrew Beer: "Back in 2021, Omicron appeared and CTAs had one of their worst days. There's no regime mechanism that could predict that."

Tom Robel acknowledges these challenges but emphasizes the importance of having a diverse set of models to quickly adapt when regimes change:

[38:30] Tom Robel: "If they do, they can identify that a new regime exists and think historically how to best take advantage of that."

The guests discuss the balance between innovation and maintaining the core strengths of trend following, highlighting the ongoing research and adaptation required to optimize CTA strategies in a dynamic market.

6. Assets Under Management (AUM) Trends in the Industry

Towards the end of the discussion, Andrew Beer brings up the stagnation of AUM in the CTA industry, referencing a decrease in Bridgewater's assets as a possible indicator of broader industry trends:

[70:55] Andrew Beer: "Bridgewater manages $97 billion now, down from $145 billion in February 2021. If this is accurate, it indicates significant shifts in where AUM is flowing."

Tom Robel responds by speculating on factors influencing AUM trends, including the competition from QIS strategies and the lack of new inflows from traditional hedge fund investors:

[72:04] Tom Robel: "There’s not a sense that people are opening lots of doors... It would be interesting if cannibalization had already occurred from QIS versus hedge funds."

They conclude that while AUM has remained stagnant or declined for some, the rise of innovative products and diversification strategies present both challenges and opportunities for the CTA landscape.

7. Final Thoughts and Future Outlook

In wrapping up, Tom Robel discusses the potential long-term benefits of CTAs amid current market volatility and geopolitical uncertainties:

[74:17] Tom Robel: "We're in the best environment for macro investing we've probably seen for the last 10 years... CTAs are part of that macro toolbox."

Andrew Beer reiterates the importance of experience and proven track records over new entrants, emphasizing sustained performance and expertise as key factors for investors:

[67:21] Andrew Beer: "There's something for everyone in innovation... I would always choose someone who has experience over someone who just has size."

The episode concludes with an optimistic outlook on the role of CTAs in providing diversification and managing risk in increasingly complex financial markets.

Key Takeaways

1. Market Volatility and Geopolitical Risks: Current global uncertainties are enhancing the relevance of CTAs and systematic investing strategies due to their ability to navigate volatile environments.

2. Trend Following Performance: While CTAs have faced a challenging start to the year, increased volatility offers potential opportunities for trend followers to capture significant market moves.

3. Managed Futures ETFs: Despite growth in this segment, traditional CTAs remain resilient due to differences in investor bases and the value of established expertise. New ETF products by firms like BlackRock are not yet posing a significant threat but could influence future dynamics.

4. Portfolio Diversification: Integrating CTAs as diversifiers in traditional portfolios can enhance risk-adjusted returns, especially through strategies like portable alpha.

5. Innovation in CTA Strategies: Ongoing research into regime identification and multi-model approaches is critical for adapting to changing market conditions and maintaining performance.

6. AUM Trends: The CTA industry faces challenges with stagnant or declining AUM, potentially due to competition from QIS strategies and shifting investor preferences.

7. Experience vs. New Entrants: Established CTAs with proven track records are favored over newer entrants, highlighting the importance of expertise and historical performance in attracting and retaining investors.

Notable Quotes

• Tom Robel, [00:46]: "Whatever people thought, you’ve got to stretch the tails out. And it's going to be an unbelievable ride from here. Good or bad, volatility is here."

• Andrew Beer, [08:43]: "The trend index had done somewhat better over the last five years than the broader index with a 2% average annual return difference."

• Andrew Beer, [17:24]: "Hedge funds started to dial up the Trump trade... The flexibility is hugely advantageous."

• Tom Robel, [25:14]: "Can investors hold onto these diversifiers... and can they actually hold onto it for long enough to benefit from the upside that they can generate in the portfolio?"

• Andrew Beer, [63:21]: "I would always choose someone who has experience over someone who just has size."

Conclusion

Episode SI339 of Top Traders Unplugged provides a comprehensive exploration of the current state and future prospects of CTAs in comparison to the emerging Managed Futures ETF market. Through insightful dialogue between Niels, Andrew, and Tom, listeners gain valuable perspectives on navigating investment strategies amidst geopolitical turmoil, market volatility, and evolving financial products. The episode underscores the enduring value of experienced CTAs in offering diversification and managing risk, while also addressing the challenges posed by new market entrants and shifting investor dynamics.

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