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

39 Pages Posted: 10 Jun 2016 Last revised: 11 Nov 2016

Jason Foran

University College Cork

Mark C. Hutchinson

University College Cork

David F McCarthy

University College Cork

John J. O'Brien

University College Cork - Department of Accounting, Finance and Information Systems

Date Written: November 10, 2016

Abstract

Recently a range of alternative risk premia products have been developed promising investors hedge fund/CTA like returns with higher liquidity, 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, our results suggest this assumption is questionable. We find that CTAs are not a homogenous group. We identify eight different CTA sub-strategies, each with very different sources of return and low correlation between sub-strategies. To illustrate the difficulty of modelling the strategies we specify recently identified alternative risk premia from the academic literature as factors to examine the sources of return of CTAs. We find that these premia fail to explain between 56% and 86% of returns. Our results suggest that, given the heterogeneity of CTAs, while these new products may deliver on liquidity, transparency and fees, investors expecting hedge fund/CTA - like returns may be disappointed.

Keywords: Performance measurement, Commodity Trading Advisors, CTAs, Alternative risk premia

JEL Classification: G10, G19, G20

Suggested Citation

Foran, Jason and Hutchinson, Mark C. and McCarthy, David F and O'Brien, John J., Just a One Trick Pony? An Analysis of CTA Risk and Return (November 10, 2016). Available at SSRN: https://ssrn.com/abstract=2791960

Jason Foran

University College Cork ( email )

5 Bloomfield Terrace Western Road
Cork
Ireland

Mark Hutchinson (Contact Author)

University College Cork ( email )

O'Rahilly Building
College Road
Cork
Ireland

David McCarthy

University College Cork ( email )

College Road
Cork
Ireland

John O'Brien

University College Cork - Department of Accounting, Finance and Information Systems ( email )

O'Rahilly Building
College Road
Cork
Ireland

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