Return Dispersion, Counterintuitive Correlation: The Role of Diversification in CTA Portfolios

Campbell & Company

Kathryn Kaminski

Research

12 Pages

Campbell & Company examines why CTA managers can post dramatically different results despite appearing highly correlated. Using portfolio theory, it argues diversification matters more than many investors assume, highlighting periods where CTA performance ranged from below 0% to above 100% while correlations remained elevated.

Key Takeaways

Upside Dispersion Matters: In 2014, CTA performance ranged from below 0% to above 100%, showing that strong momentum environments can create substantial differences between seemingly similar managers.
Correlation Can Mislead: With average cross manager correlation near 70%, investors might assume similarity, yet implied correlation fell below 30% during key periods of return differentiation.
Diversification Improves Exposure: Roughly 7 to 8 CTA managers are needed to achieve diversification comparable to an equity index with about 95% portfolio correlation under the paper’s assumptions.
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