CAIA Level II: Advanced Core Topics in Alternative Investments, 2nd Edition

29.3 BENEFITS OF CTAs

CTAs provide a number of benefits in terms of risk-return trade-offs to investors.6 These include the following:

Diversification: Managed futures constitute an alternative asset class that has achieved strong performance in both up and down equity, commodity, and currency markets, and has exhibited low correlation to traditional asset classes, such as stocks, bonds, cash, and real estate. Managed futures, when used in conjunction with traditional asset classes, may reduce risk while potentially increasing portfolio returns.

Performance: Historically, managed futures have provided risk-return profiles comparable to those of many traditional asset classes and superior to those offered by long-only investments in commodities. For example, the historical Sharpe ratio of a diversified portfolio of managed futures could be four times higher than that of a long-only portfolio of commodities.

Access to multiple markets: There are more than 150 liquid futures products across the globe, including stock indexes, currencies, interest rates, fixed income, energies, metals, and agricultural products. CTAs are able to take advantage of potential opportunities in various asset classes in many geographical locations. The fundamental law of active management states that the information ratio of an investment increases as the breadth of the investment strategy increases (holding other variables constant). This means that CTAs have the potential to provide performance with a ...