When It Pays to Follow the Crowd: Strategy Conformity and CTA Performance

Abstract

Prior research in hedge fund and mutual fund management finds a positive relation between portfolio distinctiveness and subsequent performance, suggesting that strategy differentiation is associated with superior skill. We find that CTAs with returns that correlate more strongly with those of peers feature higher performance and are more highly exposed to a time series momentum factor. In contrast to hedge funds and mutual funds, CTA strategy conformity appears to be a signal of managerial skill. These results indicate that a common trend following strategy drives CTA returns and that CTAs offer investors an opportunity to invest in momentum.

Keywords: CTA, Strategy Distinctiveness

JEL Classification: G11, G23