Commodity Trading Advisors (CTAs) have retained their full equity allocations even as markets experienced volatility, according to a UBS report published Monday. The bank says CTAs remain biased toward selling equities, but actual reductions in leverage would depend on negative price moves that trigger selling signals.
UBS cautions that while signal strength is expected to decline, a projected easing in realized volatility during February should lead only to moderate adjustments in flows rather than large-scale deleveraging. In other words, the models CTAs use may produce weaker sell signals, but substantial equity selling is unlikely unless prices move lower.
In fixed income markets, the report highlights very heavy short positions among CTAs. On UBS's measures, short exposure in rates sits around the 97th percentile of historical readings. The analysis states CTAs are positioned for higher yields in most markets, with notable exceptions in the United Kingdom and Italy where their positioning does not reflect a similar expectation.
Despite already large short holdings in some markets, UBS finds that CTAs still have room to add further selling in the United States, France, and Canada. This suggests that in those markets CTAs could increase short exposure if signals warranted.
Turning to currencies, CTAs have trimmed their U.S. dollar shorts by about 25% since UBS's prior update, effectively buying back roughly $40 billion of USD exposure versus mainly G10 peers. UBS nevertheless forecasts a tactical reversal: CTAs are expected to sell $90-100 billion of dollars over the coming two weeks, with approximately half of those flows likely to go into the euro, the British pound, and the Swiss franc.
Commodities also show shifting preference: energy has returned to favor among CTAs, which are adding to long positions in that sector. At the same time, managers continue to hold substantial stakes in both precious and industrial metals.
The UBS note paints a picture of CTAs that are reluctant to cut equity exposure absent clear downside price action, are heavily short in rates with room for more selling in specific sovereign markets, have recently reduced dollar shorts but may reverse into sizable dollar selling, and are increasing exposure to energy while maintaining metal holdings.