Testing Futures Trading Strategy Assumptions
34 Pages Posted: 3 Apr 2018 Last revised: 21 Apr 2018
Date Written: April 3, 2018
There is a growing literature examining futures based trading strategies and the performance of Commodity Trading Advisors (CTAs). In this paper, we test the validity of three key assumptions used in these studies. The validity of basing conclusions on analysis of synthetic rather than market price data is tested. We review the evidence on the level of transaction costs to test the cost model used in modelling futures based trading strategy. Finally, we test the assumption that CTAs generally charge a management fee of 2% and incentive (performance) fee of 20%. In addition, the trend over time in the structure of fees is presented. Our findings suggest that inferences based upon synthetic futures replicate those based on exchange-traded data. Over the full period, the average fee levels were measured at 1.82% (management) and 20.2% (incentive) close to and not significantly different from the levels used in the literature.
Keywords: Time Series Momentum, Commodity Trading Advisors, CTAs, Fees, Transaction Costs, Synthetic Futures
JEL Classification: G10, G19, G20
Suggested Citation: Suggested Citation