Such exceptional performance results from the upward trend in equity indices, amid buoyant economic conditions globally and the soft pace of monetary retrenchment from central banks. Meanwhile, the current U.S. earnings season is looking to be a good vintage thus far, though less than 30% of the companies listed on the S&P 500 have reported earnings as we go to press. Nonetheless, this has been enough to see the consensus revising upwards the 2018 earnings growth picture for the S&P 500 to 15.7% at present from 11.8% three months ago.
CTAs have also benefitted from supportive conditions in other asset classes. Commodity prices are enjoying strong upward trends amidst solid demand conditions and lower oil supply in countries such as Venezuela.
Their long positions on industrial metals have benefitted from better than expected economic activity in China. Additionally, their FX bucket was rewarding of late. In particular, the short positioning on the USD received a boost as the U.S. administration appeared to back a weaker dollar in Davos last week. The long positioning on the Euro and the Canadian dollar vs. the U.S. dollar were a source of substantial gains as a result. The long positioning on EM currencies vs. the USD also delivered gains. There is nonetheless one missing engine for CTAs: fixed income. The long stance on bonds was a source of losses over the course of January that partially erased their gains. According to our data, CTAs have already turned short U.S. fixed income but remain substantially long on European bonds.
Going forward, we maintain a neutral stance on CTAs despite their strong recent results.
The fact that most buckets contribute positively to performance is a strong asset. However, the high net-long position on equities is a source of risk in our view due the rich market valuation. We do not expect major trend reversals in equities or commodities in the near term, but refrain from adding to CTAs after the recent rally. A neutral stance on CTAs implies a 10% allocation in a hedge fund portfolio (based on BarclayHedge data).
