Systematic funds, the so-called Commodity Trading Advisors (CTAs), have significantly reduced their positions in stocks and bonds, and they may not be prepared to unwind these positions just yet, according to UBS strategists.
CTAs have built substantial short positions in equities, resulting in an overall positioning of -$60 billion, with a net short equivalent to 16% of their assets under management. This level of short exposure has only been seen 4% of the time in the past 30 years.
UBS expects outflows from CTAs to continue at a slower pace, with an additional $10-$15 billion expected in the next two weeks.
“Weeks go by and the bond market still can't find any supporter. Being max short, CTAs are far from being one of them, although they did not contribute to the last leg higher in yields. Their duration trade is now very deep 'in the money', meaning that for CTAs to start unwinding their shorts, we will need to witness a proper bond rally (>40/50bps),” the analysts wrote in a report.
CTA signals indicate a preference for modestly bullish positions in Japanese equities, neutrality in both U.S. and European equities, and bearish stances in emerging markets, especially China.
Furthermore, CTAs are bearish across various bond markets.