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Strategies for Turbulent Times

Eric A. Siegel

By Eric A. Siegel

Global Head of Multi-Asset Class Solutions - Citi Investment Management

June 3, 2016

Financial markets endured a turbulent start to 2016. The S&P 500 Index fell both in January and February, while high yield credit in both corporate and emerging markets also came under pressure.

Although the months of March and April brought some relief, we see a risk of ongoing volatility ahead. Greater volatility often hits during the late stages of an economic recovery. And that is where we believe we are now in the cycle.

What can investors do when faced with increased volatility? We see potential ways of mitigating volatility’s impact on portfolios and even exploiting it. For suitable clients, one possibility is to consider including a certain type of strategy within their allocations, which Citi Private Bank has classified as ‘Diversifier strategies.’ Diversifier strategies try to take advantage of large and unusual movements in the markets. They can go long or short in many different securities and assets. Their returns can often have low – or even negative – correlation with traditional asset classes.

Diversifier strategies can follow three different styles. Here’s an example of one them, Commodity Trading Advisor (CTA) managers.[1] CTAs trade in and out of markets based on computerized ‘buy’ and ‘sell’ signals. Their computer programs can often scan more than 100 different futures and forwards markets, searching for trends to follow or trying to spot new trends in the making. Because their strategies are automated, human emotions are taken out of the equation, helping to make more objective decisions during times of stress.


Source: Bloomberg, as of 17 May 2016. The S&P 500’s best and worst quarters are defined as the calendar quarters in which the index achieved its highest and lowest returns between 30 June 1988 and 31 March 2016. Past performance is no guarantee of future results. Real results may vary. The indices are unmanaged. An investor cannot invest directly in an index. Real results may vary.

The S&P 500 index is a capitalization-weighted index representing the stock performance of 500 large companies in leading industries of the US economy. The Barclays CTA Index is an equally-weighted composite tracking the performance of established Commodity Trading Advisors’ programs with more than four years of performance history, rebalanced annually. As of the annual rebalancing at the start of 2016, there were 532 programs included in the index. 

The accompanying table highlights a potential benefit of investing with CTA managers, using the Barclay CTA Index as a proxy. It shows how the Barclay CTA Index has performed during the ten worst calendar quarters for the S&P 500 Index between mid-1988 and the end of 2015. These included the depths of the 2007-09 global financial crisis and the bursting of the technology bubble in 2002. In eight of these ten episodes, overall Barclay CTA performance was positive. The Barclay CTA Index’s average gain was 5.1% compared to an average loss in the S&P of 13.9%. By contrast, in the S&P’s ten best calendar quarters, the Barclay CTA Index’s average gain was 0.5% with four negative quarters, compared to a 15.4% average gain for the S&P.

Despite their often-negative correlation with other asset classes, Diversifier strategies also come with risks. For example, their performance can struggle when markets go sideways or change direction abruptly. The computer programs behind them can sometimes get caught out by volatility that triggers repeated false signals. And there are also times when they are unable to trade owing to a sudden drought of liquidity in the markets and occasionally because of a software issue.

Given our Global Investment Committee’s market outlook, we believe that now may be a favorable time for suitable clients to allocate to Diversifier strategies. This type of strategy could potentially enhance the risk-adjusted returns of a portfolio made up of several asset classes. That said, we would also stress that not all Diversifier strategies are created equal or appropriate for all investors. Getting appropriate exposure requires careful selection. Our manager research analysts therefore scour a universe of thousands of strategies and do rigorous due diligence reviews on potential candidates. We then work with you and within your investment objectives to help select appropriate managers, given your risk, return and liquidity goals.

[1] In addition to CTA managers, Diversifier strategies also encompass Global Macro managers and Relative Value managers. Global Macro Managers are generally fundamental and discretionary, relying on macroeconomic data to pursue potential opportunities across regions and asset classes. Relative Value managers seek to exploit differences in the prices of the same or similar securities, otherwise known as “pairs trading.”

This document is offered for informational purposes only and does not constitute an offer to sell any securities. Opinions expressed herein may differ from the opinions expressed by other businesses or affiliates of Citigroup, Inc., and are not intended to be a forecast of future events, a guarantee of future results or investment advice, and are subject to change based on market and other conditions. In any case, past performance is no guarantee of future results, and future results may not meet our expectations due to a variety of economic, market and other factors. Further, any projections of potential risk or return are illustrative and should not be taken as limitations of the maximum possible loss or gain. Although information in this document has been obtained from sources believed to be reliable, Citigroup Inc. and its affiliates do not guarantee its accuracy or completeness and accept no liability for any direct or consequential losses arising from its use. Throughout this publication where charts indicate that a third party (parties) is the source, please note that the attributed may refer to the raw data received from such parties.

Investment products are not bank deposits; are not insured by the FDIC or any other government entity; are not obligations of or guaranteed by Citibank, Citigroup or any of their respective affiliates; and involve investment risk, including the possible loss of the principal amount invested.

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