CTAs: Superior Performance or Diversification Only?

Abstract

Commodity Trading Advisors (CTAs) are associated with preferable risk–return characteristics, especially during market dislocations. However, it is still difficult to identify the underlying return sources of the strategy due both to lack of data and to potentially biased available data. After setting up a cleaned universe of CTAs building on data from 1971 to 2016 and accounting for specific biases, the authors empirically analyze their return distributions. In line with existing research, their results show the non-normal distribution of CTA return profiles, in particular statistically significant leptokurtic distributions. The common claim that CTAs exhibit positive skewness, however, cannot be confirmed. Further, they empirically study the two most commonly claimed risk–return properties typically associated with CTAs: improved risk-adjusted returns of traditional portfolios through allocation to CTAs and above-average risk-adjusted returns of CTAs on a stand-alone basis. They confirm the first claim but do not find sufficient evidence supporting the second claim.

TOPICS: Commodities, futures and forward contracts, performance measurement