CTAs - Portable Alpha's Perfect Match

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• Portable alpha strategies are resurging with Commodity Trading Advisors (CTAs) emerging as ideal alpha engines following 2022's market turmoil.
• CTAs offer structural advantages as alpha sources through their cash efficiency, "anti-fragile" properties, and tendency to grow more defensive during market stress.
• The industry shift toward Total Portfolio Approach (TPA) has fueled interest in strategies that boost returns without disrupting existing allocations.

Institutional investors face a dilemma. Their liquid assets must work harder, yet they can't reduce equity exposure. The 2022 market turmoil exposed a harsh reality: When stocks and bonds fall, private market holdings offer no immediate relief.

"The experience of 2022 highlighted a particular desire in people's portfolios," explains Razvan Remsing, Director of Investment Solutions at Aspect Capital. "They want to make their liquid part of their portfolio work harder."

Razvan started his career during the Global Financial Crisis and is now in his 16th year at Aspect. He has watched portable alpha strategies rise, fall, and now return with a crucial difference: pairing the right alpha with the right beta creates resilience rather than fragility.

"CTAs are almost anti-fragile," Razvan notes. "The more volatile, the more stressed the markets get, the general tendency for CTAs is to take cover or become more cash-rich."

This self-correcting property contrasts with earlier portable alpha strategies. Many collapsed under stress during market crises.

Why portable alpha is back

The portable alpha concept—separating alpha and beta components to create more efficient portfolios - isn't new. However, according to Razvan, its resurgence was unexpected.

What happened in 2022? Many institutions had shifted heavily into private markets. When their liquid assets suffered losses, they faced a squeeze. Private market cash flows slowed while near-term bills still needed payment.

Investors now urgently seek more diversification without abandoning equities.

"It's not as if the 60/40 [traditional portfolio split between stocks and bonds] is dead. It's just that we know it's not enough to just have very diversified liquid alts there."

Few want to reduce equity exposure during strong markets. Many allocators say simply: “I don't want to go underweight equities, but I want to diversify.” The tension reflects a real career risk for investment professionals who face criticism if they reduce equity exposure during a bull market that continues to rise.

Portable alpha offers an elegant solution that allows investors to maintain their strategic equity allocations while adding diversifying strategies that can perform during market disruptions, without the need to make wholesale changes to existing portfolio structures.

CTAs: The ideal alpha engine

Not all portable alpha implementations are created equal. The original versions from the early 2000s often used extreme leverage and weren't sufficiently resilient during tail events. Many shared common vulnerabilities that became painfully apparent during the 2008 crisis.

CTAs and trend-following strategies offer distinctive advantages:

"With $15 to $25 in a hundred, you can get access to a decent, well-diversified CTA strategy. With another $15 to $20, you could replicate a hundred dollars notional of equity exposure, and you still have plenty of cash left over for potentially significant adverse conditions," explains Razvan.

This conservative structure creates a framework that can withstand severe market conditions while providing uncorrelated returns—contrasting sharply with previous portable alpha approaches that often collapsed under stress.

The behavioral edge

Beyond the technical advantages, there's a compelling behavioral case for packaging CTAs within portable alpha structures. Trend-following strategies inherently zig when other assets zag, creating performance patterns that can be psychologically challenging for investors.

"The biggest challenge to living with CTAs is the behavioral pressure," Razvan observes. "It's uncorrelated and tends to zig and zag at different times to the most widely held asset class."

CTAs differ significantly from traditional investments. CTAs have down months about half the time, while equities rise about two-thirds of the time. This creates a psychological challenge: when stock markets decline, institutional investors share this experience with peers—there's comfort in collective underperformance.

However, CTAs often decline at different times than the broader market which creates periods of standalone underperformance that feel more difficult to justify to stakeholders. This timing difference, though statistically beneficial for overall portfolio performance, creates behavioral pressure that makes CTAs harder to hold as standalone investments.

By pairing CTAs with equity beta in a portable alpha structure, these behavioral challenges are mitigated. "If you pair them together," Razvan explains, "suddenly that positive pattern that you get with trend following—with more frequent but smaller negative months—they can get 'hidden' behind this widely held asset class."

Who's adopting these strategies?

Not every investor benefits from portable alpha with CTAs. Many allocators prohibit adding market exposure to their portfolios. However, Razvan sees strong interest from mid-sized institutions.

"There is a segment of allocators that maybe is midsize that don't have the scale or the ability to construct bespoke solutions or to notionally fund," Razvan explains.

These investors typically use funds rather than separately managed accounts. They already have significant equity exposure in their portfolios. Portable alpha offers them access to CTA benefits without disrupting their core allocations.

These strategies are finding adoption in two main areas:

• Equity asset class teams: Razvan has seen interest from equity portfolio managers who are incentivized to outperform their benchmarks but find it challenging to beat active equity returns through traditional means. "I've had good conversations with equity asset class leads," he notes. "It's been really hard to beat active equity," making these overlay strategies an attractive way to enhance performance.
• Institutional completion portfolios: Some larger institutions have developed what Razvan describes as "completion portfolios" that exist outside traditional asset class buckets. "Some institutions have this pool of assets that sits on top of their asset class buckets," he explains. These portfolios, often overseen by the CIO's office, provide another potential home for portable alpha strategies.

Connection to evolving portfolio management

The growing interest in portable alpha links to another investment shift. Many institutions are now moving toward a Total Portfolio Approach (TPA) rather than traditional strategic asset allocation (SAA).

Historically, many institutions have operated with siloed investment teams optimizing within individual asset classes. The Total Portfolio Approach looks at underlying risk factors and optimizes across the entire portfolio.

"It sounds like common sense, but actually it's very hard to achieve," Razvan explains, noting the organizational challenges of shifting from specialist teams to a more generalist approach.

For institutions that want to move in this direction but remain structurally siloed, portable alpha offers a middle ground - a way to make individual asset classes work harder without completely reorganizing.

A shifting market environment

The portable alpha comeback coincides with major shifts in the global macro picture. We've moved from secular stagnation to pronounced volatility across economic indicators.

"The current environment is far more fragmented, far more divergent," Razvan observes, pointing to recent policy shifts in Germany, questions about US exceptionalism, and changing dynamics in Asia. "These are all sources of potential big macro trends to emerge."

Such divergence creates fertile ground for trend-following strategies, which thrive on capturing price movements across different asset classes as they respond to changing conditions. "We're not fitted. I have no prior sense of the fair value of any particular asset, and I have no geographical bias," Razvan explains, highlighting the adaptive nature of CTAs.

As institutional investors continue navigating challenging market conditions—balancing growth objectives with liquidity needs, seeking diversification without sacrificing returns—portable alpha strategies with CTAs offer a compelling solution.

"I will not rest until every single portfolio at least has the ability to benefit from what we provide," Razvan states, "which is a really interesting return stream that requires handholding. It's not the most natural allocation, but it's so good if you can get yourself some exposure to it."

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This is based on an episode of Top Traders Unplugged, a bi-weekly podcast with the most interesting and experienced investors, economists, traders and thought leaders in the world. Sign up for our Newsletter or subscribe on your preferred podcast platform so that you don't miss out on future episodes.