Since 2016 the CTA index (white line, “hedge funds” mainly in the model trading niche) has been going one way, lower, while the SPX (orange) has been going higher (until the “hick up” last quarter). The aggregate pool of money they manage is big, but not huge, but given the fact leverage is used, these “guys” can actually move prices, especially in markets where liquidity is low.
Longer term they probably aren´t overly significant movers of prices, but in the short term the CTA space can most probably affect prices, and create a feedback loop where any short-term moves are exaggerated by models adding to a certain trend, but often overlooking the liquidity effect.
We have written on several occasions about the poor liquidity and the CTA index strategies affecting prices, and it is according to us what happened late last year as well as this year. In early January we outlined our logic that being “Bearish is not unique here” (SPX was 6% lower back then).
We have shown how the CTA models flipped their strategies into net short as markets took the last dip lower in December. “Pushing” futures lower around Christmas was probably not overly hard to accomplish as liquidity always is awful around those holidays.
At one stage in late December, the CTA index had taken back much of the p/l pain from the October sell off, but as markets reversed sharply higher, the average model fund seems to have been trapped in net shorts, and as liquidity has been rather poor, the covering of these shorts have been working the same way as in late December, but this time in a feedback loop the “wrong” way for the CTA players.
Several of the bigger CTA funds are down some 3% YTD, but have actually been putting on gains over past few days. Note the last little uptick in the CTA index (white) in the below chart.
We ask ourselves if this last rally in equities is to be attributed largely to the CTA model chasers, who now seem to have covered shorts and risk having flipped over to net longs, all executed in another poor liquidity market?
That would be rather ironic.
Source; charts by Bloomberg
