Fooling Some of the People All of the Time: The Inefficient Performance and Persistence of Commodity Trading Advisors

42 Pages Posted: 8 Oct 2008 Last revised: 17 Aug 2013

Geetesh Bhardwaj

SummerHaven Investment Management

Gary B. Gorton

Yale School of Management; National Bureau of Economic Research (NBER)

K. Geert Rouwenhorst

Yale School of Management - International Center for Finance

Multiple version iconThere are 2 versions of this paper

Date Written: August 13, 2013

Abstract

Investors face significant barriers in evaluating the performance of hedge funds and commodity trading advisors (CTAs). The only available performance data comes from voluntary reporting to private companies. Funds have incentives to strategically report to these companies, causing these data sets to be severely biased. And, because hedge funds use nonlinear, state-dependent, leveraged strategies, it has proven difficult to determine whether they add value relative to benchmarks. We focus on commodity trading advisors, a subset of hedge funds, and show that during the period 1994-2012 CTA excess returns to investors (i.e., net of fees) averaged 1.8 per cent per annum over US T-bills, which is insignificantly different from zero. We estimate that CTAs on average earned gross excess returns (i.e., before fees) of 6.1%, which implies that funds captured most of their performance through charging fees. Yet, even before fees we find that CTAs display no alpha relative to simple futures strategies that are in the public domain. We argue that CTAs appear to persist as an asset class despite their poor performance, because they face no market discipline based on credible information. Our evidence suggests that investors’ experience of poor performance is not common knowledge.

Keywords: Commodity Trading Advisors, CTA, Hedge Funds, Performance Measurement

Suggested Citation

Bhardwaj, Geetesh and Gorton, Gary B. and Rouwenhorst, K. Geert, Fooling Some of the People All of the Time: The Inefficient Performance and Persistence of Commodity Trading Advisors (August 13, 2013). Yale ICF Working Paper No. 08-21. Available at SSRN: https://ssrn.com/abstract=1279594

Geetesh Bhardwaj

SummerHaven Investment Management ( email )

Soundview Plaza,
1266 East Main Street
Stamford, CT 06902
United States

Gary B. Gorton

Yale School of Management ( email )

165 Whitney Ave
P.O. Box 208200
New haven, CT 06511
United States

HOME PAGE: http://mba.yale.edu/faculty/profiles/gorton.shtml

National Bureau of Economic Research (NBER)

1050 Massachusetts Avenue
Cambridge, MA 02138
United States

K. Geert Rouwenhorst (Contact Author)

Yale School of Management - International Center for Finance ( email )

165 Whitney Avenue
P.O. Box 208200
New Haven, CT 06520-8200
United States
203-432-6046 (Phone)
203-432-8931 (Fax)

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