Tackle High Inflation and Volatile Markets with Commodity Trading Advisors (CTAs)

Systematic trend-following strategies for every market challenge
 

CTAs: Under the Hood

Today’s investor faces many challenges. After decades of low inflation and low interest rates that supported relatively steady economic growth, inflation and interest rates have soared as lockdown measures imposed during the COVID-19 pandemic eased, and a massive rebound in economic activity ensued.

Unsurprisingly, markets have been tumultuous of late, as major geopolitical issues are also spooking investors. Correlation among asset classes has increased as well. Traditional equities and fixed income used to perform differently under various economic conditions (i.e., they had low correlation), providing valuable portfolio diversification and enhanced return potential with less overall risk. Now such asset classes are more correlated, with their similar performance characteristics resulting in weaker diversification and greater risk.

What can an investor do under such trying conditions? Consider an investment solution managed by registered professionals known as Commodity Trading Advisors (“CTAs”) that offers convenient access to a well-diversified and inflation-fighting commodities strategy, provides correlation benefits and is designed to thrive when equity markets are in crisis. As regulated money managers, CTAs use stringent rules-based, trend-following strategies on commodity and financial futures that help strip the emotions out of investing.

Institutional investors have long recognized the benefits of CTAs. In fact, sovereign wealth plans and pensions have used CTAs for decades, often making “risk mitigation” and “crisis risk offset” strategies a core portfolio component. CTAs have traditionally comprised a meaningful allocation in sophisticated institutional portfolios.

How to Invest

CI Auspice Alternative Diversified Corporate Class employs a disciplined, multi-strategy investment process to generate returns from its exposure to global commodities. The fund’s active, systematic approach aims to preserve capital as it generates returns uncorrelated to traditional equity, fixed income and most alternative strategies. One of its core goals is to achieve relative outperformance (known as “alpha”) in times of significant equity market corrections (”crisis alpha”).

When the Auspice Diversified Trust launched in 2007, it was exclusive to institutional and select accredited and high-net-worth investors. Now this strategy is available to retail investors as a public “liquid alternative” Mutual Fund and  through CI as a feeder fund to the well established Auspice flagship fund. Whereas many alternative strategies are highly illiquid (i.e., assets must stay invested for longer periods), CI Auspice Alternative Diversified Corporate Class offers daily liquidity so investors have easy access to their money.

The fund is advised by Auspice Capital Advisors, the largest active commodity and CTA fund manager in Canada, founded by a team that has over 25 years of experience in the world of quantitative investing and commodities, with approximately $1B in firm AUM (as at February 1, 2024). 

Here are two key reasons why many institutional investors have been drawn to Auspice Diversified Trust, and why CI Auspice Alternative Diversified Corporate Class should resonate with retail investors:

1. Crisis alpha. As the following chart illustrates, Auspice Diversified Trust has a proven track record of delivering strong performance in an equity sell-offs. Please note the BTOP50 CTA Benchmark Index seeks to replicate the overall composition of the managed futures industry with regard to trading style and overall market exposure. While the BTOP50 has a 35-year history of generating crisis alpha, Auspice Diversified Trust has a 17-year track record of crisis alpha outperformance, and has also outperformed the BTOP50 CTA benchmark since inception.
   
   Auspice Diversified Trust, Crisis Alpha Since Inception
   
   
   Sources: Bloomberg Finance L.P. and Auspice Investment Operations, as at August 31, 2023.
   
   
2. Inflation hedge. While high inflation tends to negatively impact traditional equities and fixed income, commodities have generally registered positive returns amid inflation surges and periods of “normal” inflation alike. Among the dynamic strategies, trend-following provides the opportunity for protection during notable inflation shocks. The following chart shows the real total returns of various assets during eight periods of significant U.S. inflation, plus the annualized return during inflationary, non-inflationary and all periods. In the first column, the strategy is denoted as active or passive by “A” or “P,” respectively.
   

   Specific inflation regimes									Combined regimes
   	US enters WW2	End of WW2	Korean War	Ending of Bretton Woods	OPEC oil embargo	Iranian revolution	Reagan's boom	China demand boom	Inflation (19%)	Other (81%)	All (100%)
   Start month	Apr 1941	Mar 1946	Aug 1950	Feb 1966	Jul 1972	Feb 1977	Feb 1987	Sep 2007
   End month	May 1942	Mar 1947	Feb 1951	Jan 1970	Dec 1974	Mar 1980	Nov 1990	Jul 2008
   Total price level chg	15%	21%	7%	19%	24%	37%	20%	6%
   Length (mths)	14	13	7	48	30	38	46	11
   Strategy	Real return (total)								Real return (ann.)
   (P) Commodities - Energies	-3%	2%	-6%	-16%	264%	57%	201%	68%	41%	-1%	3%
   (A) Trend – All assets	20%	23%	19%	135%	196%	100%	65%	17%	25%	15%	16%
   (A) Trend – Commodities			1%	54%	173%	33%	132%	25%	20%	8%	10%
   (P) Commodities – Industrial				115%	38%	-6%	306%	3%	19%	4%	7%
   (A) Trend – Bonds				79%	54%	149%	6%	6%	15%	9%	10%
   (P) Commodities – Aggregate		12%	6%	26%	85%	38%	84%	21%	14%	1%	4%
   (P) Commodities – Gold					166%	154%	-18%	27%	13%	-1%	1%
   (P) Commodities – Precious				28%	29%	185%	-27%	33%	11%	-2%	1%
   (A) Trend – Equity	20%	23%	24%	77%	23%	-13%	13%	-3%	8%	11%	10%
   (P) Commodities – Softs				-41%	243%	15%	11%	15%	8%	-3%	-1%
   (A) Equity Factor – Cross-sectional Mom.	-15%	-18%	7%	35%	38%	44%	41%	26%	8%	4%	5%
   (P) Commodities – Agri		12%	6%	-23%	197%	-21%	6%	33%	7%	-3%	0%
   (A) Trend – FX					-14%	16%	42%	6%	4%	4%	4%
   (A) Equity Factor – Quality (QMJ)				14%	-1%	-12%	40%	7%	3%	3%	3%
   (P) Fixed Income – TIPS				-3%	13%	-2%	11%	6%	2%	3%	3%
   (A) Equity Factor – Investment (CMA)				-7%	31%	-9%	24%	-10%	2%	2%	2%
   (P) Long Equities – Energy Sector	-14%	-10%	25%	-19%	-19%	31%	31%	2%	1%	8%	6%
   (A) Equity Factor – Profitability (RMW)				4%	-24%	-8%	18%	6%	-1%	2%	2%
   (A) Equity Factor – Value (HML)	-4%	-17%	3%	-8%	36%	-11%	-3%	-7%	-1%	2%	2%
   (P) Real Estate – Residential	-17%	4%	-4%	-2%	-7%	11%	0%	-13%	-2%	2%	1%
   (A) Equity Factor – Low Vol (BAB)	-24%	-6%	-3%	28%	-13%	9%	-7%	-22%	-3%	8%	6%
   (P) Fixed Income – 2 Yr. Treasury	-13%	-17%	-6%	-1%	-7%	-17%	11%	0%	-3%	2%	1%
   (A) Equity Factor – Size (SMB)	-11%	-23%	-4%	45%	-43%	32%	-26%	-4%	-4%	1%	0%
   (P) Fixed Income – 10 Yr. Treasury	-11%	-17%	-6%	-13%	-12%	-31%	8%	5%	-5%	4%	2%
   (P) Fixed Income – High Yield	-4%	-11%	0%	-18%	-21%	-38%	-10%	-8%	-7%	6%	4%
   (P) Long Equities – Market Composite	-24%	-27%	24%	-7%	-46%	-14%	12%	-17%	-7%	10%	7%
   (P) Fixed Income – Investment Grade	-7%	-12%	-3%	-23%	-20%	-43%	-5%	1%	-7%	6%	3%
   (P) Fixed Income – 30 Yr. Treasury	-17%	-17%	-6%	-20%	-28%	-41%	13%	2%	-8%	5%	3%
   (P) Long Equities – Consumer Durables	-16%	-32%	24%	-30%	-62%	-27%	-28%	-36%	-15%	13%	7%

   Source: The Best Strategies for Inflationary Times, May 25, 2021. Returns for energies and gold in grey italics are spot returns where futures data was not available, and are not included in the combined regime calculation. The data will vary by start date.

Key attributes coveted by investors

Given the positive aspects of Auspice Diversified Trust, it becomes clear why CI Auspice Alternative Diversified Corporate Class is worth considering by retail investors seeking a robust solution to today’s pressing issues of equity volatility and inflationary pressures. The strategy has historically benefited from:

• A higher allocation to the burgeoning commodities market relative to its peers
• Negative correlation to equities; no correlation to fixed income and most other alternatives
• A portfolio management team with demonstrated experience trading in volatile environments
• A history of consistent outperformance (alpha) during equity market corrections
• A history of strong performance in periods marked by high inflation and volatility
• An additional return earned on the cash position (typically over 90% of the fund) given the nature of futures-based strategies

Is your portfolio constructed to offset the potentially damaging effects of volatile equities and high inflation? Protecting and building your wealth empowers you to approach the future with greater confidence. If CI Auspice Alternative Diversified Corporate Class sounds like the type of CTA managed investment strategy that can help you withstand the current environment, please visit the fund page to learn more.