According to BarclayHedge, the AUM of CTA funds stood at USD 316.8bn as of 4Q 2014.

During 2014, CTA

assets

declined by ~4%, in sharp contrast to their average ~25% growth rate during 1980-2011.

During the 2011-2013 period, CTA funds delivered relatively poor performance (Figure 5). This was perhaps
the main

reason behind the slowdown in asset inflows since 2011 (Figure 6). Many investors asked us to explain this

underperformance and provide an opinion on the future CTA performance.We did not have to wait long to
see CTA

performance sharply rebound in 2014 and 2015 with a +11.8% return over the past 12 months for the
BarclayHedge CTA

index – the best 12 month return since 200811. It is widely believed that strong outperformance reflects
the ability of

Momentum strategies to capture the strong recent trends in commodities (particularly the ~50% oil drop
over the past 6

months) and currencies (in particular the ~25% USD rally against various global currencies).

To analyze the key drivers of the poor performance during the 2011-2013 time period, and recent strong
performance of

CTAs, we replicated a CTA benchmark with a set of exposures to our prototype Momentum strategies in
Equities,

Bonds/Rates, Currencies, and Commodities (see details in the next Chapter) as well as to isolate the cash
return component.

Figure 7 (with further details in the section ‘CTA Exposure to Prototype Momentum Factors’ on page 48),
shows that afterfee

CTA returns to investors fell from an average of +7.4% (of which +4.1% were due to cash returns) during
1994-2010 to

-1.9% during the 2011-2013 time period. A main driver of the decline was the dramatic reduction in cash
yields since the

2008 crisis from an average of +4.1% to +0.6% per annum, which significantly affected the ‘cash-rich’
managed futures'

ability to generate absolute returns. The decline in cash yields was related to the secular decline in bond
yields, reinforced

by central banks’ counter-deflationary actions. This demonstrates how low yields find its way into every
segment of the
financial system (in this case central bank actions reduced the total return of a specific risk premia
strategy).

Figure 8, shows the breakdown of CTA performance into individual asset Momentum strategies. 12 One can
notice that the

2011-2013 deterioration of CTA fund excess returns during the recent 3 years was mostly due to the poor
performance of

Currency, Commodity and Bond related Trend Risk Factors and weak alpha. These exposures were also
responsible for the

11 Similar conclusion could be reached for other CTA benchmark indexes.

12 Alpha and performance attribution were calculated assuming the average exposure of CTA funds to our
prototype ‘Trend Factors’

didn’t change during 1994-2014. The result is based on 10bps one-way turnover cost and 15bps monthly
slippage cost assumptions.

Lower (higher) cost assumptions would increase (decrease) Alpha. See more details on page 48 for our
analysis of ‘CTA Exposure to

Prototype Momentum Factors’.

Figure 5: CTA performance during Jan 1990 – Feb 2015

Source: Bloomberg, J.P. Morgan Quantitative and Derivatives Strategy.

Figure 6: AUM (USD bn) of CTAs and Hedge Funds (ex CTAs)

Source: BarclayHedge, J.P. Morgan Quantitative and Derivatives Strategy.

10

20

30

40

50

60

70

80

90

100
0

100

200

300

400

500

600

700

800

90 92 94 96 98 00 02 04 06 08 10 12 14

BarclayHedge CISDM 36-month Correl (RHS)

Poor Performance

During 2011-2013 0

500

1,000

1,500

2,000

2,500

3,000

50

100

150

200

250

300

350

1997
1998

1999

2000

2001

2002

2003

2004

2005

2006

2007

2008

2009

2010

2011

2012

2013

2014

CTA Hedge Funds (RHS)

16

Systematic Cross-Asset Strategy

15 April 2015

Marko Kolanovic

(1-212) 272-1438

marko.kolanovic@jpmorgan.com

Zhen Wei, CFA

(852) 2800-7749

zhen.wei@jpmorgan.com
record performance of CTAs in the second half of 2014. In addition, we see CTAs delivered Alpha of +7.1%
in 2014 before

fee Alpha and estimated fee at +9.5% and +2.4% respectively.

Figure 7: CTA gross return breakdown by distribution destination (%)

Source: J.P. Morgan Quantitative and Derivatives Strategy.

* Based on the average of Barclay CTA Index, BTop 50 Index, DJCS CTA Index and CISDM CTA

Index. ** Cash returns are based on the J.P. Morgan 3-Month US$ Cash Index.

Figure 8: CTA gross return breakdown by asset class (%)

Source: J.P. Morgan Quantitative and Derivatives Strategy.

* Based on the average of Barclay CTA Index, BTop 50 Index, DJCS CTA Index and CISDM

CTA Index. ** Cash returns are based on the J.P. Morgan 3-Month US$ Cash Index.

4.1

0.6 0.0

3.5

2.7 2.4

3.3

-2.5

12.4

-4

-2

10

12

14
16

1994-2010 2011-2013 2014

Net Excess Return Fees Cash

0.9

-1.2

1.0 2.6

-0.7

1.9 1.5

0.1

1.5 1.5

1.2

-0.3

4.1

0.6

0.0

1.6

0.7

9.5

-4

-2

10

12

14
16

1994-2010 2011-2013 2014

Alpha Cash Equity

Bonds Curncy Comdty

17

Systematic Cross-Asset Strategy

15 April 2015

Marko Kolanovic

(1-212) 272-1438

marko.kolanovic@jpmorgan.com

Zhen Wei, CFA

(852) 2800-7749

zhen.wei@jpmorgan.com

Prototype Momentum Factors

18

Systematic Cross-Asset Strategy

15 April 2015

Marko Kolanovic

(1-212) 272-1438

marko.kolanovic@jpmorgan.com

Zhen Wei, CFA

(852) 2800-7749

zhen.wei@jpmorgan.com

19

Systematic Cross-Asset Strategy

15 April 2015

Marko Kolanovic

(1-212) 272-1438
marko.kolanovic@jpmorgan.com

Zhen Wei, CFA

(852) 2800-7749

zhen.wei@jpmorgan.com

Introduction

In this section we outline different implementations of a Momentum strategy, and study the historical
properties of a range

of simple Momentum strategies (prototype factors). Designing a factor entails the selection of underlying
assets, choice of

metrics used to identify Momentum, as well as various technical aspects of implementation such as
rebalance frequency,

investment horizon and transaction costs. Our prototype factors are based on 3, 6, and 12 month price
return signals and are

implemented in each of the traditional asset classes: Equities, Bonds, Currencies and Commodities. In
addition to historical

performance, we analyze correlation properties of these prototype factors in some detail.

As we outlined in the previous section, the first step in designing a Momentum strategy is deciding whether
to employ

Absolute or Relative Momentum filters. Absolute Momentum Strategies (also called Time Series
Momentum, or TSM in

short) use trend indicators to determine the price trends of each asset individually, based on which a long
(or short) position

is established. An example is to use a simple 12-month price return: go long an asset with positive 12-
month return; stay in

cash (or short) asset with negative 12-month return. Relative Momentum Strategies (also called Cross
Sectional

Momentum, or CSM in short) employ trend indicators to rank assets on a relative basis. An example is to
use past 6-month

return to rank assets, then go long a portfolio of the top-performing assets and short a portfolio of the
bottom-performing

assets. If there is persistence in the relative asset returns, such a long/short portfolio would deliver a
positive return.

Figure 9 below compares a typical long/short Relative Momentum strategy with a long/short Absolute
Momentum strategy:
while a Relative Momentum strategy performs cross-sectional ranking of assets during each rebalancing, an
Absolute

Momentum strategy runs through each asset and determines long/short positions on an individual basis13.

Figure 9: Comparing a Relative Momentum Strategy with an Absolute Momentum Strategy

Source: J.P. Morgan Quantitative and Derivatives Strategy

Absolute Momentum could also be characterized as a special case of Relative Momentum by comparing the
relative trends

of only two assets: a risky asset and a risk-free asset.

13 While long/short Relative Momentum Strategies could be designed to be market neutral, a long/short
Absolute Momentum Strategy

usually comes with time-varying market exposure depending on the trends of underlying assets. In addition
to long/short Momentum

strategies, one could also design long-only and hybrid Momentum strategies. See Chapter 2-3 of the report
for more details.

Asset 2

Asset 1

Asset N

...

Long Portfolio

Top Trending

Assets

Asset Pool

Short Portfolio

Bottom Trending

Assets

Rank by

Relative Trends

Long/Short Portfolio

A TypicalRelative Momentum Strategy

Asset 2
Asset 1

Asset N

...

Asset Pool Long/Short Portfolio

A TypicalAbsolute Momentum Strategy