A Quantitative Analysis of CTA Funds

115 Pages Posted: 26 Nov 2004  

Simon Vuille

University of Lausanne - School of Economics and Business Administration (HEC-Lausanne)

Corneliu Crisan

University of Lausanne - School of Economics and Business Administration (HEC-Lausanne)

Abstract

Our research studies various properties of commodity trading advisors (CTAs) from a quantitative point of view. Our investigation is based on a commercial database of 549 funds and focuses on the period 1990 to present.

Firstly, CTAs' return distributions are analyzed and strong evidence of non-normality is found, stressing the need for portfolio allocation techniques which take into account higher-order moments.

Secondly, relative persistence in return distribution parameters is studied. We find strong persistence for volatility, but fail to find significant persistence for average return or higher order moments.

Thirdly, we review the major benchmarks available to the industry and build new benchmarks from our dataset. This allows us to infer the magnitude of various biases. We study homogeneity of 2 CTA subsets, namely trend-followers and non-trend-followers, and study the diversification possibilities in a CTA portfolio.

In the second part of the study, we focus on linking CTAs returns with that of traditional assets. After showing that a buy and hold multi-factor linear model fails to explain CTAs returns, we point out the presence of option-like payoffs in CTAs return patterns. Trend-following CTAs exhibit straddle-like payoffs, while non-trend-followers' return patterns that are reminiscient of a long call option.

Lastly, using simple trading algorithms based on moving averages, we propose a linear market model in which factors capture the dynamic nature of CTA managers' strategies. Our model leads to significant improvements over the classical model. Notably, we show that our model is able to closely replicate a broad index of CTAs for long out-of-sample periods.

Keywords: Commodity Trading Advisors, Trend-Followers, Performance Persistence, Market Model, Trading Strategy

JEL Classification: C40, G10, G11

Suggested Citation

Simon Vuille and Crisan, Corneliu, A Quantitative Analysis of CTA Funds. Available at SSRN: https://ssrn.com/abstract=623261 or http://dx.doi.org/10.2139/ssrn.623261

Simon Vuille (Contact Author)

University of Lausanne - School of Economics and Business Administration (HEC-Lausanne) ( email )

Unil Dorigny, Batiment Internef
Lausanne, 1015
Switzerland

Corneliu Crisan

University of Lausanne - School of Economics and Business Administration (HEC-Lausanne) ( email )

Unil Dorigny, Batiment Internef
Lausanne, 1015
Switzerland

Paper statistics

Downloads
1,564
Rank
8,281
Abstract Views
6,393