Comparing CTA Strategies

There are several ways for Commodity Trading Advisors to make money in the markets, but the two most common strategies fall under the categories of systematic and discretionary.

While the purpose of this lesson is not to discuss which strategy is superior, investors in managed futures should have a good understanding of these two leading strategies employed by CTAs.  Those new to managed futures should certainly comprehend the advantages and pit falls of each.  And, there are some CTAs that combine elements of both strategies!

Systematic CTAs

A systematic CTA usually makes trades based on models or computer programs.   These signals could be based on technical analysis using charts, trend following, momentum indicators, and stochastics.  Also, they could be derived from fundamental factors such as economic data like energy supply and demand, employment data etc.

A true systematic CTA will rely solely on the buy and sell signals generated by their computer model.  All human intervention and guess work or trading from the gut is eliminated.  Given that human emotions are susceptible to wide swings, trading off models keeps this issue at bay.  One of the complaints about systematic trading is that models usually need to be tweaked.    A system that appears to generate profitable signals in a high interest rate environment might not be as profitable in a low interest rate environment.  The same goes for low volatility vs. high volatility environments…which can play havoc with the best of models.

Discretionary CTAs.

Discretionary CTAs are nearly the exact opposite – trading decisions are made at the discretion of the portfolio manager.   Again, they can be based on fundamentals or technical, but a human is at the heart of the trading decision.  While the term “gut feeling” arises when talking about discretionary traders, most discretionary CTAs have very elaborate trading strategies based on solid research as well as very precisely defined risk management strategies.  But ultimately, all trading decisions lie with the traders.   As you can imagine this has pros and cons.    Unlike a model, the discretionary trader may at times let emotions get in the way.  This can lead to suboptimal results at times.

For example, during the financial crisis, the sense of panic caused many traders to make poor decisions.  But to be fair, there were models that didn’t work very well in a market panic too.

Neither strategy is fool proof – both can be profitable but can also generate losses.  This is part of the investment world.  There are CTAs with very long and successful track records in each category.

Can a CTA blend the two strategies?  Of course.  One thing about the financial markets is that they adapt over time.   A CTA could have many models they work with (the systematic component), but override final decisions at their discretions.  Or one could be a practitioner of discretionary strategies, but use computers to analyze fundamental and technical data (the systematic component).   It’s like the debate about fundamental analysis and technical analysis.  Can the two be blended?  Over the years a great many investors have had good success in the markets integrating both.

Comparison of the two strategies:

  Systematic Discretionary
Models need to be reworked from time to time Yes No
Relies primarily on Computerized models Human decision making based on solid research.
Emotional swings Largely non-existent Yes and can play havoc
Required good technology Yes Less dependent on technology
Number of practitioners according to BarclayHedge Over four hundred Just over one hundred
Performance advantages n/a Slight performance advantages*

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Peter Knight Advisor


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