The Chicago Mercantile Exchange (“CME”) in this new paper defines crisis alpha as performance during equity bear phases, such as late 1998, 2000-2002 and 2008. Unsurprisingly, the two equity hedge fund strategies that avoid long exposure to equities have produced positive crisis alpha: equity short biased and equity market neutral managers. CTAs, which can be long or short equities, are the other only hedge fund strategy that delivered positive crisis alpha – so say the CME. Every other hedge fund strategy, according to the BarclayHedge indices, suffers from negative crisis alpha, as the chart below shows. (Click the chart to enlarge.)
One point the CME did not make is that synthetic replication approaches may also be to recreate a CTA return profile, and these do not always involve trading futures. One of the oldest replication techniques identified by Fung and Hsieh in this 2001 paper involves owning a basket of look-back straddles (puts and calls both at the money) that would probably be traded OTC bypassing exchanges. So, the CME is educating investors about the benefits of CTA strategies, but the educated investor also has a menu of vehicles at their disposal to access positive crisis alpha from such strategies.