AnotherAspect: CTAs amidst Macroeconomic Woes

4 October 2019

Back to Insight

Anthony Todd, Chief Executive Officer

"Make no mistake: global growth is under threat in 2019. Macroeconomic indicators could be a useful way to quantify the extent of this threat in order to position accordingly."

Macroeconomic indicators condense a wide range of economic data into a single value to capture periodic fluctuations (cycles) in economic activity with respect to their longer-term historical trends. They are often created and used by central bank economists to proxy economic growth and in order to heavily inform their monetary policy decision-making. As a result, market participants also keep a close eye on these indicators as they can have a significant effect on prices.

Macroeconomic indicators can be used to classify the state of current economic conditions into regimes such as the following:

Worse Economic Conditions:

  • recovery (below average and improving)
  • contraction (below average and deteriorating)

Better Economic Conditions

  • expansion (above average and improving)
  • slowdown (above average and deteriorating)

We have used three macroeconomic indicators as they are used by central banks and followed by market participants. Moreover, these indicators are also produced at least monthly.

We acknowledge that the choice of indicators are US centric and may not compare perfectly with global economics. Despite this, we do have the advantage of extensive history and therefore consistency. Besides, history has repeatedly shown worldwide economic interdependence to the extent that when the US sneezes, the whole world can catch a cold. This could be epitomised over the past 20 full years whereby the correlation between the year-on-year changes in the IMF World GDP and the US GDP has been approximately 83%.

In order to compare values across the three selected macroeconomic indicators, normalised z-scores are shown and used below.

Macroeconomic Indicators

Chicago Fed National Activity Index 3-Month Moving Average (CFNAI3MMA) is a monthly indicator favoured by Fed economists to quantitatively describe changes in volume of economic activity:

  • Preferred version of the Chicago Fed National Activity Index (CFNAI) which is smoothed to cut through noise
  • The CFNAI is a monthly weighted average of 85 underlying component indicator values drawn from four categories: Production and Income; Employment, Unemployment and Hours; Personal Consumption and Housing; Sales, Orders and Inventories
  • The CFNAI3MMA is designed such that positive values indicate above average pace of economic advancement and negative values indicate below average pace of economic advancement

Note: The data with respect to various indices is shown for illustrative purposes only. Detailed descriptions of the indices used are available on request.

FED National Activity.png

FED National Activity2.png

Chicago Fed National Activity Diffusion Index (CFNAI-DIFFUSION) is a monthly indicator favoured by Fed economists to quantitatively describe breadth within the changes in economic activity:

  • Measurement of the proportion of 85 underlying component indicators that are improving versus deteriorating (degree to which changes in national activity are spread out across the 85 underlying CFNAI components)
  • The CFNAI-DIFFUSION is often used by economists to identify turning points or divergence, e.g. if CFNAI3MMA is advancing but CFNAI-DIFFUSION is reducing, this suggests imminent underlying weakness in the US economy

Note: The data with respect to various indices is shown for illustrative purposes only. Detailed descriptions of the indices used are available on request.

Chicago FED Diffusion.png

Chicago Fed Diffusion 2.png

Aruoba-Diebold-Scotti Business Conditions Index (ADS) is a weekly index produced by the Fed and favoured by many Fed economists to quantitatively describe and track real-time conditions for US businesses at a high-frequency:

  • Updated every time there is new information on six underlying series: weekly initial jobless claims, monthly payroll employment, industrial production, personal income, manufacturing/trade sales, quarterly real GDP
  • Progressively bigger positive ADS values indicate progressively better-than-average conditions and more negative values indicate worse-than-average conditions
  • Given that the entire ADS timeseries is revised on an almost daily basis, we will use the first ever available month-end data published by the Fed for this study

Note: The data with respect to various indices is shown for illustrative purposes only. Detailed descriptions of the indices used are available on request.

Auroba-Diebold-Scotti.png

Auroba-Diebold-Scotti 2.png

Aspect Diversified Programme (“ADP”) under different macroeconomic regimes

We compare the macroeconomic z-score of each month to the previous value to classify that month into the four regimes (indicator states): recovery, contraction, expansion, slowdown. We also classify each monthly z-score based on whether it is positive to indicate ‘above average economic conditions’ or negative to indicate ‘below average economic conditions’. We then compare and average the monthly returns of ADP across the various regimes and conditions. We also lag the monthly z-score by one month with respect to the ADP returns to understand how ADP performed the month following the macroeconomic indicator reading.

Monthly Indicators Table.JPG

Note: Aspect Diversified started trading on 15th December 1998. The performance data used above for Aspect Diversified from January 2019 onwards has not been audited. The returns shown are net of the fees (and relevant crystallisation periods) applicable to the A share class of the flagship fund trading the programme over time, currently a 2.00% management fee (accrued weekly and paid monthly in arrears) and 20.00% performance fee (determined and debited (if applicable) annually). The returns used include the reinvestment of all sources of earnings. The performance of customised or modified implementations of the Programme may differ to the performance shown above. Past performance is not necessarily indicative of future result.


  • For all three indicators, average ADP returns have been positive regardless of the regime
  • For all three indicators, average ADP returns have been better during months of above average economic conditions compared to below average economic conditions
  • For all three indicators, average ADP returns have been better in the month following a month associated with below average economic conditions
  • For all three indicators, during the periods associated with the most positive economic scenario of a positive indicator which has been getting more positive, ADP had the strongest average returns
  • For two out of three indicators, ADP provided the strongest average return in the month following the weakest economic scenario (negative indicator getting more negative)

Looking Ahead

The current economic cycle has proceeded at a tepid pace despite massive fiscal stimulus and exceptionally low rates and we keep being told that we are in the very late stages. Looking forwards, the central banks of most countries have signalled worries over a slowing or contracting global economy, not only through their rhetoric but also by implementing dovish monetary policies in the first half of 2019. Furthermore, trade tensions and rising geopolitical unrest have darkened the investment outlook for many market participants. As at the end of H1 2019, all three macroeconomic indicators are pointing to economic conditions which are below average.

The Aspect Diversified Programme has shown positive performance irrespective of macroeconomic regime as well as much needed outperformance in the in the gloomiest scenarios. Additionally, given the rise in our discussions with investors around this topic, it might be suitable to consider a CTA such as the Aspect Diversified Programme, especially at a time of mounting economic pessimism.


Note: Any opinions expressed are subject to change and should not be interpreted as investment advice or a recommendation. Any person making an investment in an Aspect Product must be able to bear the risks involved and should pay particular attention to the risk factors and conflicts of interests sections of each Aspect Product’s offering documents. No assurance can be given that any Aspect Product’s investment objective will be achieved.

Latest News & Insight