Just a One-Trick Pony? An Analysis of CTA Risk and Return

Abstract

Recently, a range of alternative risk premium products has been developed, promising investors hedge fund/Commodity Trading Advisor (CTA)-like returns with higher liquidity and transparency and relatively low fees. The attractiveness of these products rests on the assumption that they can deliver similar returns. Using a novel reporting bias–free sample of 3,419 CTA funds as a testing ground, the authors’ results suggest that this assumption is questionable. They find that CTAs are not a homogenous group. They identify eight different CTA substrategies, each with very different sources of return and low correlation between substrategies. To illustrate the difficulty of modelling the strategies, they specify recently identified alternative risk premiums from the academic literature as factors to examine the sources of return of CTAs. They find that these premiums fail to explain between 56% and 86% of returns. Their results suggest that given the heterogeneity of CTAs, although these new products may deliver on liquidity, transparency, and fees, investors expecting hedge fund/CTA-like returns may be disappointed.