The Footprint of Trend-following

Can CTAs really move the market?

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Executive Summary

In this note, we estimate the market participation of the trend-following CTA industry on the most liquid equity, fixed income & rates, currency, and commodity futures markets. More specifically, we provide what we believe is a realistic estimate of the trend-following industry’s share of positions held and volume traded in these different markets.

To measure the market participation of a trend-following Managed Futures Program or CTA, we adapt two widely used metrics – total open interest and total daily volume traded – and exclude any non-directional calendar-spread related trading activity. To this end, we introduce a systematic method to estimate the share of directional trading activity across asset classes. We find that for equities, fixed income, and currency futures, the calendar-spread related activity is limited, while for commodities and short-term interest rates futures, less than 70% of the open interest represents an outright risk, and less than 50% (for commodities) and 65% (for STIRs) of the reported total volume is directional.

We conclude that, assuming the size of the trend-following industry at approximately $300bn, trend-following CTAs account on average for less than 10% of the total directional open interest and less than 1% of the total directional traded volume across global futures markets since 2020. We show that the net aggregate notional exposure in equities of trend-followers has evolved in a range between $-100bn and $+500bn over the past three years. This compares to an average global equity market capitalization above $100tn and an average global equity futures open interest of $1.3tn.

According to our model, the equity market participation of trend-following has never exceeded 3.5% of total futures directional volume measured over any five-day period since 2020, even during periods characterized by extreme changes in positioning, like the sell-off of March 2020 or the bear market rally in summer 2022. Our results do not indicate that trend-following CTAs have grown too large to execute trades effectively in the markets they operate in, nor do they suggest that their size would enable them to move markets significantly in the direction of their trading in any of the asset classes. Moreover, despite the size of the CTA industry increasing more than tenfold since 2000, the market participation has remained in a relatively narrow range (at both aggregate and asset class level), reflecting a simultaneous increase in the capacity of cash and underlying futures markets.

Our results support the thesis that the capacity limit of CTAs in terms of the participation rate is far from being reached. The high liquidity of the underlying markets and the still moderate participation rates suggest that CTAs are unlikely to move underlying market prices significantly.

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Quantica Capital
December 8, 2022