Recently, an investor asked if investing in CTAs was investing in a crowded trade. We think not!, comments Dr. Tillmann Sachs, Chief Investment Officer and Head of Research of J8 Capital Management LLP in a recent blog post.
A) According to the Bank of International Settlement (BIS), the total notional outstanding in derivatives in 2016 was $444 trillion. CTAs manage approximately $350 billion assets under management (BarclayHedge). Assuming an average leverage of 200% across the CTA and Managed Futures industry (CTA survey), CTAs manage approximately $700 billion in notional outstanding. CTAs only make 0.16% of the total notional outstanding in derivatives.
B) Looking at segments and the most crowded: The typical CTA allocation holds 35% in bonds/interest rates, 30% in commodities, 20% in currencies, and 15% in equity linked derivatives (CTA survey). Using BIS data, commodities are the smallest derivatives segment with total notional outstanding of $1.35 trillion. CFTC data suggests about 15% of commodity futures are held by speculators, i.e. approximately 8% of notional outstanding in commodity futures is held by CTAs.
In respect of the total derivatives markets and the US Treasury's definition of a crowded trade, we conclude that CTAs have such small and dissimilar positions that they offer little risk in terms of insufficient liquidity, should market participants seek to unwind their positions simultaneously. CTAs are therefore not a crowded trade.