Commodity Trading Advisors and Capturing Alpha


I wanted to comment on the CTA performance paper I mentioned the other day. From the paper:

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.

So, these funds do a good job of capturing alpha (or at least the beta of the strategy) but charge way too much. I am a huge fan of managed futures, but it is nothing more than a long/short approach to commodities (though some trade financials and interest rates) very similar to my paper. The marketers for these funds always compare graphs that show the benefit of adding them to a standard 60/40 stocks bonds allocation, but never to a balanced allocation including commodities (where the benefits are much more muted).

I also think this is an area that was formerly alpha that has now been commoditized to alternative beta. Most (the paper estimates 75%) of CTAs are just simple trend-followers that can be captured with some standard strategies. As an example, RYMFX was the first public mutual fund to come out trading managed futures, and cost a more expensive fee of around 1.7%. Competition will bring those fees down, and the LSC ETN charges around 75 bps.

One could substitute LSC for some of all of the commodities portion of the allocation I mentioned.

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