Current market environment performance of dynamic, risk-managed investment solutions.
By Will Hubbard
Unexpected discoveries have always fascinated me. As a former student in the FIRST Robotics program, I learned to embrace brainstorming without judgment. Our coaches encouraged us to write all ideas—good or bad—on a giant board, reminding us that even a seemingly silly suggestion could inspire a great idea. This mindset continues to shape how I view innovation and value.
Consider the story behind Post-it notes. In the 1970s, 3M chemist Spencer Silver accidentally created a low-tack adhesive while trying to develop a super-strong glue. At first, it wasn’t clear how a glue that didn’t stick well could be useful.
Enter Art Fry, another 3M employee. After becoming frustrated by bookmarks falling out of his hymnal during church choir practice, Fry experimented with Silver’s adhesive by putting some on the edge of paper. He found that these pieces of paper could be easily repositioned and would not fall off the page. What started as an unexpected discovery became one of 3M’s most iconic and successful products.
The lesson? Sometimes, opportunities arise where we least expect them. This idea came to mind recently while exploring commodity trading advisors (CTAs) with the Flexible Plan Investments (FPI) Research team. Much like 3M’s discovery, CTAs have evolved from their original purpose into something far more impactful for today’s investors.
What are CTAs?
CTAs were originally marketed to farmers to manage price risks associated with commodity markets like agriculture, energy, and metals. By using futures contracts, producers could hedge against price fluctuations and better manage their inventory. For instance, a corn producer could hedge the price of their expected crop yield for the year by using the futures market to sell contracts for future delivery.
Over time, CTAs evolved beyond their agricultural roots. Today, they manage and trade risks across more markets around the world, including equity indexes and currencies, using systematic and quantitative methods. CTAs are bucketed as their own asset class and historically trade in an uncorrelated fashion to traditional equity and fixed-income markets.
Numbers don’t lie
To evaluate the potential of CTAs, we analyzed their performance using the Societe Generale CTA (SG CTA) Index, a benchmark that tracks the performance of leading CTAs. We compared CTAs with stocks (as represented by the S&P 500) and bonds (as represented by the 20+ Year Treasury Bond ETF TLT) over two decades. Gold was included as an additional commodity reference but was not part of the core analysis. The findings were illuminating:
• CTAs returned about the same as bonds but with lower volatility, especially in recent years with the sharp rise in interest rates.
• CTAs had a higher Sharpe ratio—a measure of risk-adjusted returns—than bonds, highlighting their efficiency in balancing risk and reward.
CTAs also demonstrated a low correlation with traditional asset classes, suggesting strong diversification benefits.
Enhancing portfolios with CTAs
To assess the impact of CTAs in portfolios, we compared an annually rebalanced 60/40 equity-bond portfolio with a 60/20/20 equity-bond-CTA portfolio, starting in 2002. Once again, the results were compelling:
• The 60/20/20 portfolio delivered similar returns but with lower volatility.
• Risk-adjusted returns (Sharpe ratio) improved, and drawdowns (DD) reduced from over 27% to less than 18%.
These results show that CTAs can improve portfolio metrics and create a more pleasant investment experience.
Making CTAs accessible to all investors
Historically, CTAs were exclusive to high-net-worth investors via hedge funds, often accompanied by large minimum investments, limited liquidity, and steep fees. Today, regulatory changes and advancements in technology are now bringing these strategies within reach for everyday investors, though the shift is still in its early stages.
Forward-thinking firms like FPI are leading this shift by reimagining venerable CTA strategies, like those of Eckhardt Trading Company, into accessible, investor-friendly mutual fund and investment strategies. In FPI’s case, the mutual fund offers the same systematic trading advantages but with low minimums, daily liquidity, and simplified tax treatment. You can read more about FPI’s new Quantified Eckhardt Managed Futures Strategy Fund (QETCX) and the investment strategies making use of it here.
Put the unexpected to work in your portfolio
Like the invention of Post-it notes, CTAs are a prime example of finding value in the unexpected. Their low correlation with traditional assets, ability to manage risk, and adaptability to various market conditions make them a valuable addition to portfolios. As we enter a new year, investors should consider CTAs as part of a diversified asset allocation strategy.
FPI is excited to be part of this evolution, making institutional-quality strategies like Eckhardt’s more accessible to a broader audience. For those seeking innovative ways to improve portfolio outcomes, CTAs may be the missing piece.