Practical Applications of Testing Futures Trading Strategy Assumptions

Practical Applications Summary

In Testing Futures Trading Strategy Assumptions, from the the Fall 2019 issue of The Journal of Alternative Investments, Mark C. Hutchinson and John O’Brien (both of the Cork University Business School, University College, Cork) investigate the robustness of common assumptions made in studies of commodity trading advisor (CTA) performance. Two factors motivate their inquiry: The first is an increasing interest in performance studies of these futures-based trading strategies. The second is that existing skepticism in reported high risk-adjusted CTA returns is attributed to faulty assumptions underlying prior studies, and that such assumptions produced overstated performance.

The authors examined (1) the appropriateness of using synthetic futures as a proxy for CTA strategy returns, and (2) the reasonableness of typical assumptions about transaction costs, management fees, and incentive fees. They found that strategy returns using synthetic futures were highly correlated with those based on the corresponding exchange-traded instruments. Transaction costs vary across asset classes. Both transaction costs and management fees have declined over time. In general, the authors found that assumptions that account for these differences in transaction costs over time were realistic approximations of the true costs.