Candriam has been managing CTA strategies since 1997. Head of Quantitative Multi-Asset Strategies, Steeve Brument, joined as a fund manager in 2001, took responsibility for the strategy in 2006 and his team revamped it in 2007. In 2009, Candriam was amongst the first to launch an alternative UCITS trend following CTA, which removed commodities in February 2014 based on its interpretation of new regulations.

“The product is designed for maximum participation in up or down trends while limiting losses during more challenging times for tend followers,” says Brument. Since 2018 it has considerably outperformed other UCITS CTAs with both higher returns and lower volatility. The models are designed to maximize convexity, both through more reactive signals and responsive risk management.

Performance in different environments

“Our approach, which quickly responds to new developments in the markets, has been navigating the environment and the various crises well. We successfully navigated the emergence of the Covid crisis, the subsequent bull market, and the inflation surge while minimizing losses during adverse events such as the SVB failure in March 2023,” says Brument. “2016 was also a great year as our models navigated the Brexit referendum and Donald Trump election,” he adds.

Brument views the strategy as an all-weather one but generally expects it will add most value for portfolios during crises: “I would like to say CTAs can thrive in both crises and calmer periods, and as we published in some papers, CTAs can perform well in any phase of the cycle. However, the periods that add the most value to investor portfolios would be crises such as 2008, December 2018, Covid and 2022. But this does not stop CTAs from participating in rising equity markets such as 2019 and 2023. Overall, CTAs need trends to perform, and low volatility uncorrelated trends are the best possible environment”.

CTAs through stages of the economic cycle

Candriam has identified macro cycles, behavioural finance and diversification as the three key CTA performance drivers. Macro cycles are the focus of some Candriam research papers, such as the December 2022 paper CTAs: Ride of the Valkyries, where Candriam documents how CTAs have provided tail risk hedges during financial, geopolitical and health crises.

Candriam’s June 2023 paper On the Economic Rationality of CTAs by Brument and Senior Systematic Fund Manager, Johan Mauchand, explores how CTAs perform at different phases of the economic and business cycle, which Candriam categorise into recovery, expansion, peak and recession. Growth and recession cycles are defined by the US National Bureau of Economic Research, and Candriam has developed its own definitions for the four phases. Between 1980 and June 2024, there were 319 months of expansion, 94 months of recovery, 58 months of recession and 48 months of peak.

The research found that CTAs provide positive performance in all four phases of the cycle and have shown lower dispersion of returns than bonds or equities. CTAs also improved risk adjusted returns on a 60% equities/40% bonds portfolio during all phases and enhanced absolute returns in all four apart from expansion. In addition, CTAs did better when these phases lasted longer.

Candriam conclude that capturing trends during all four phases means CTAs are economically rational. For instance, economic growth increases demand for energy and raw materials, and especially benefits equity and currency markets of countries exporting these resources, while policymakers then need to raise rates to curb inflation, creating new trends.

Underperforming periods and drawdowns

The absence of commodities left Candriam Diversified Futures lagging average CTA performance in 2014 when the oil price crashed. In 2017 the strategy also underperformed other CTAs in general as the lack of trends in interest rates, bonds and currencies detracted from returns, and these losses were not outweighed by profits on US equities. “High correlation during the ZIRP (Zero Interest Rate Period) was an issue, mostly because trends were less pronounced on fixed income and currencies,” acknowledges Brument.

The strategy had a drawdown between late 2016 and late 2018, though this was much shallower and shorter than the one seen in the SG Trend index, as Candriam recovered faster. For most of 2018, the strategy was wrong-footed by the same challenges faced by most other CTAs. The “Volmageddon” VIX spike in February 2018 caught many CTAs off guard, and later in the year recession fears resulted in a sharp equity market correction. Yet by December 2018, Candriam delivered a positive month, partly as it responded to the equity market reversal faster than some other CTAs.

Steady volatility

The volatility target of 8-10% (although the prospectus mentions below 12%) is towards the high end of the range for Candriam’s suite of alternative strategies, some of which are cash or fixed income substitutes aiming at only cash plus 1-2% with low single digit volatility. Candriam Diversified Futures has roughly double the volatility target of the equity market neutral strategy that targets mid-single digit volatility.

Candriam’s CTA also targets fairly constant volatility and will therefore downsize notional exposure during more volatile market conditions. In a year like 2022, increased market volatility led to smaller positions in bonds and rates, but the strategy nonetheless very profitably captured these downtrends.

During the Covid crisis, volatility increased across all asset classes, not just equity indices. “Our models reacted to this sudden increase by reducing the size of our positions. Our positions on equity indices were reduced by a factor of 10,” recalls Brument.

Complementary strategies

Candriam Diversified Futures’ volatility is reduced by the low correlation between its three strategies: trend following, mean reversion and pattern recognition. Short term means reversion/contrarian models introduced in 2007 and pattern recognition models added in 2008 usually post a positive performance when markets lack trend.

These strategies also trade on different timeframes, which means they sometimes augment and sometimes counterbalance or offset the trend signals. “These two types of models have shorter trading frequencies than trend following models. They alternate between being in the same direction as the trends and being on the opposite sides. Our signals are netted by our order management software before being sent to the markets,” says Brument. All three strategies have made a positive contribution to performance since inception.

In addition to the three strategies, in some cases Candriam has also developed asset class specific models. Since the VIX index of implied US equity volatility shows momentum and mean reverting elements, it deserves a special approach that combines some universal models with some tailored ones. “The VIX is traded using trend following models which are also present on other contracts, but we also have non-trend following models specific to the VIX,” reveals Brument.

Equal weighting asset classes

The fund has been equally risk weighted in interest rates, bonds, currencies and equity indices since 2007. Though Candriam defines bonds and rates as two asset classes, some investors might simply view half of the risk budget as being in “fixed income”. Brument explains why Candriam splits it in this way: “We consider bonds and interest rates as two asset classes. Though they are correlated, the performance of one is influenced by the central bank while the other one is more market driven”.

The focused investment universe of 36 liquid markets has grown over time, though some markets have also been deleted due to performance, liquidity or external factors such as sanctions that are relevant to the Russian Rouble currency.

In currencies, both developed and emerging market units are traded. There is no explicit carry model or signal, but carry can provide a significant element of trend returns across various asset classes. “Emerging market currencies can create a meaningful carry trade, which is well captured by trend models,” says Brument.

New markets need to demonstrate a diversification benefit and adequate liquidity. Corporate credit indices and emerging market interest rate swaps are traded elsewhere in the firm and Candriam is researching them as potential additions to the CTA investment universe.

Candriam Diversified Futures is not currently exposed to “alternative markets”, though Brument does monitor them and is well aware that they have generated better trends over some periods.  “Alternative markets can offer different opportunities. They were useful during the ZIRP era when trends in fixed income and currencies were not very sustained. Liquidity in alternative markets can however be more constrained than with listed products, and they might not offer as much convexity during periods of market stress as CTAs focusing on macro assets,” argues Brument.

A toehold in alternative data

Candriam Diversified Futures is primarily a traditional technical CTA but has started to explore and harness other data types: “Most of our models use price data as well as price-derived indicators like volatility for example. Over the years we have added a few models using alternative data, but it remains only a small fraction of our overall allocation,” says Brument.

Brument sums up: “Minor evolution occurs periodically but the overall philosophy has remained the same. The most notable change in our approach was removing commodities in 2014”.

Execution and IT

The liquid investment universe is easily traded via electronic execution. “Over the years we have developed a very efficient electronic order routing system. Trading electronically means that we pay particular attention to network availability and reliability of the infrastructure,” says Brument.

Enhancing cash returns

CTAs are amongst many hedge fund strategies that can have 80% or more in cash because futures and forwards are cash efficient instruments traded on margin. Candriam is eking out a somewhat enhanced cash return: “We have a dedicated cash management team that manages to remunerate cash slightly above the €STR (Euro short term rate),” says Brument.

Synergies within Candriam Alternatives

Since December 2023, Brument has been Global Head of Alternative Investments and a member of the Executive Committee. He now oversees alternative investments at Candriam including discretionary strategies, such as the index arbitrage and equity market neutral strategies this year which are periodically profiled by The Hedge Fund Journal. “There are many benefits to being part of a larger group, it allows us to create synergies in research activities and IT infrastructure as well as reinforcing our communication and servicing toward our clients,” he says.

For instance, Candriam has access to an extensive suite of leading IT vendor packages for front, middle and back office and other functions and develops some customized IT solutions. “Firm-wide we have some common tools, while at the same time the specific needs of each team might be fulfilled with dedicated tools,” says Brument.

Some single strategies can also plug into multi-strategy vehicles. For example, the trend following strategies implemented in Candriam Diversified Futures are one of the building blocks of Candriam Multi Asset Premia, which also received a UCITS Hedge award this year.

How CTAs and alternatives fit into portfolios

Candriam’s January 2024 paper Alternative Strategies: Is 40/30/30 the new 60/40? by Senior Systematic Fund Manager Johann Mauchand, demonstrates that a 30% allocation to alternative strategies including CTAs, event driven, equity market neutral and funds of hedge funds has improved the risk/return on a traditional 60/40 equity/bond portfolio and argues that the new paradigm could be 40% equities, 30% bonds and 30% alternative strategies. This would have improved Sharpe ratios and reduced drawdowns based on data since 1990.

The optimal mix of CTAs and other alternatives does vary through the cycle. Even during a prolonged economic expansion phase, when equities are performing well, alternatives improve the Sharpe ratio and reduce drawdowns, but with an emphasis on event driven strategies. During a ‘peak’ followed by ‘recession’ phase Candriam argue that the allocation to CTAs should be maxed out at 22.5% to reduce drawdowns and volatility.