Commodity Trading Advisors: Are They a Threat for Futures Commodity Markets?

Abstract

Nowadays commodity investing is facing a tremendous interest from all kinds of investors, the surging amount invested in commodity related indices being one of the manifestations of this phenomenon. Due to their historical de-correlation with conventional securities and their hedging properties against inflation, commodity investment is being perceived as a true asset class. Therefore, the question of commodity investment is of interest for investors but also for academics. As a consequence, there had been a common statement that the commodity price rally of the last 10 years is largely due to new operators in the futures markets. The economist point of view on that issue was to question if the "speculators" side had affected those markets. As a matter of fact alternative investment, encompassing CTAs CPOs and Hedge Funds, had been criticized for their presumed bad impact on the commodity futures prices. This paper will not seek to find a clear-cut answer to the ancestral economic question of the financial operators increasing the risks in futures markets. The aim of this paper is to demystify one the historical actor of the futures markets whom are often misunderstood by non-financial actors. Using quantitative methods (multifactor models and rolling style analysis windows) we find that CTAs seem to have a relatively low exposure to commodities futures. We also try to define the causality relation between those whom are liquidity provider and liquidity user using the CFTC data on open interest from major futures contracts. Using Variance Decomposition and Granger causality test, on a sample of the major contracts, we find that non commercial investors seemed to enter the future market after a change in commodity prices not the other way around, playing therefore the role of liquidity provider for most of the commodity analysed in this study.

Keywords: CTA, commodity, volatility, open interest, Vector Auto Regression, Style Analysis

JEL Classification: C10, G14, G15