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Fooling Some of the People All of the Time: The Inefficient Performance and Persistence of Commodity Trading Advisors

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  • Geetesh Bhardwaj
  • Gary B. Gorton
  • K. Geert Rouwenhorst

Abstract

Investors face significant barriers in evaluating the performance of hedge funds and commodity trading advisors (CTAs). The only available performance data comes from voluntary reporting to private companies. Funds have incentives to strategically report to these companies, causing these data sets to be severely biased. And, because hedge funds use nonlinear, state-dependent, leveraged strategies, it has proven difficult to determine whether they add value relative to benchmarks. We focus on commodity trading advisors, a subset of hedge funds, and show that during the period 1994-2007 CTA excess returns to investors (i.e., net of fees) averaged 85 basis points per annum over US T-bills, which is insignificantly different from zero. We estimate that CTAs on average earned gross excess returns (i.e., before fees) of 5.4%, which implies that funds captured most of their performance through charging fees. Yet, even before fees we find that CTAs display no alpha relative to simple futures strategies that are in the public domain. We argue that CTAs appear to persist as an asset class despite their poor performance, because they face no market discipline based on credible information. Our evidence suggests that investors' experience of poor performance is not common knowledge.

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Paper provided by National Bureau of Economic Research, Inc in its series NBER Working Papers with number 14424.

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Date of creation: Oct 2008
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Handle: RePEc:nbr:nberwo:14424

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Cited by:
  1. Frankel, Jeffrey & Rose, Andrew K., 2010. "Determinants of Agricultural and Mineral Commodity Prices," Working Paper Series, Harvard University, John F. Kennedy School of Government rwp10-038, Harvard University, John F. Kennedy School of Government.
  2. Dichev, Ilia D. & Yu, Gwen, 2011. "Higher risk, lower returns: What hedge fund investors really earn," Journal of Financial Economics, Elsevier, Elsevier, vol. 100(2), pages 248-263, May.
  3. Bolong Cao & Shamila Jayasuriya & William Shambora, 2010. "Holding a commodity futures index fund in a globally diversified portfolio: A placebo effect?," Economics Bulletin, AccessEcon, vol. 30(3), pages 1842-1851.
  4. Adam Zaremba, 2010. "Are Managed Futures Indices Telling Truth? Biases in CTA Databases and Proposals of Potential Enhancements," Contemporary Economics, University of Finance and Management in Warsaw, University of Finance and Management in Warsaw, vol. 4(4), December.
  5. Miffre, Joëlle & Brooks, Chris, 2013. "Do long-short speculators destabilize commodity futures markets?," International Review of Financial Analysis, Elsevier, Elsevier, vol. 30(C), pages 230-240.
  6. Basu, Devraj & Miffre, Joëlle, 2013. "Capturing the risk premium of commodity futures: The role of hedging pressure," Journal of Banking & Finance, Elsevier, Elsevier, vol. 37(7), pages 2652-2664.

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