Coombs, who is also the manager of the Rathbone Multi Asset Portfolios, sees an increased risk of earnings downgrades that would make equities look less attractive and also increase volatility. The manager has therefore begun investing in commodity trading advisors rather than equity long/short strategies.
His portfolios now hold Aspect Capital’s Aspect Capital Diversified Trends Fund, a computer-driven strategy that takes long and short positions across equities, government bonds, commodities, currencies and interest rates.
“Yes, CTAs have a higher volatility but a lower correlation has a bigger impact on our portfolios and actually reduces volatility at a portfolio level.” said Coombs. “As always, it is high correlation that really kills returns.”
“However, CTAs do not offer diversification at inflection points, so they are no substitute for cash or cash-proxies to combat tail risk.”
“Many ELS managers have a structural long bias, whereas CTAs have a lower correlation to equities so add more value from a diversification perspective.”
