The trading of commodities futures dates to at least the 1850s, and commodity trading advisers represent the second-biggest hedge fund category. Yet meaningful performance measurement of CTAs and adequate benchmarks remain elusive.
CTAs are well known for their reluctance to disclose trades in detail — leading to the "black box" designation — so it is difficult to create benchmarks for them that are based on the underlying assets. As a result, investors have tended to benchmark CTA strategies against their peers. This is a relatively blunt instrument because peer benchmarking does not reveal or mimic the underlying drivers of CTA returns.
A new study, "Trends' Signal Strength and the Performance of CTAs," published in the CFA Institute Financial Analysts Journal, describes a potential solution to this issue. The study proposes a model that better replicates the performance of CTAs than a peer-group benchmark and enables investors to better select skilled managers.