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The Effects of Incentive Compensation Contracts on the Risk and Return Performance of Commodity Trading Advisors

Author

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  • Joseph H. Golec

    (Clark University, Graduate School of Management, 950 Main Street, Worcester, Massachusetts 01610)

Abstract

This paper shows that commodity trading advisors' (CTAs) investment performance may be partially explained by their incentive compensation contracts. Contracts include base, incentive and asset parameters. The relationships between contract parameters and performance are theoretically indeterminate but are examined here empirically. Results indicate that incentive parameters are positively related to return means and standard deviations. The dollar amounts of assets CTAs manage are negatively related to return means and standard deviations, supporting Elton et al.'s (1987, 1989) finding that CTA performance falls after public offerings of commodity funds. Intuitively, since dollar fees are a function of assets, at the higher asset and fee levels achieved through commodity fund offerings, CTAs may safeguard assets and fees by pursuing less risky investment strategies.

Suggested Citation

  • Joseph H. Golec, 1993. "The Effects of Incentive Compensation Contracts on the Risk and Return Performance of Commodity Trading Advisors," Management Science, INFORMS, vol. 39(11), pages 1396-1406, November.
    • Handle: RePEc:inm:ormnsc:v:39:y:1993:i:11:p:1396-1406
    DOI: 10.1287/mnsc.39.11.1396
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    Cited by:

    1. Golec, Joseph & Starks, Laura, 2004. "Performance fee contract change and mutual fund risk," Journal of Financial Economics, Elsevier, vol. 73(1), pages 93-118, July.
    2. Lim, Terence & Lo, Andrew W. & Merton, Robert C. & Scholes, Myron S., 2006. "The Derivatives Sourcebook," Foundations and Trends(R) in Finance, now publishers, vol. 1(5–6), pages 365-572, April.
    3. Fulkerson, Jon A. & Hong, Xin, 2021. "Investment restrictions and fund performance," Journal of Empirical Finance, Elsevier, vol. 64(C), pages 317-336.

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