Skip to main content
MENU
Subscribe
  • Sign Up Free
  • LOGIN
  • Subscribe
  • Topics
    • Alternatives
    • Artificial Intelligence
    • Consultants
    • Defined Contribution
    • ESG
    • ETFs
    • Face to Face
    • Hedge Funds
    • Industry Voices
    • Investing
    • Money Management
    • Partner Content
    • Pension Funds
    • Private Equity
    • Real Estate
    • Regulation
    • SECURE 2.0
    • Special Reports
    • Washington
    • White Papers
  • Rankings & Awards
    • 1,000 Largest Retirement Plans
    • Top-Performing Managers
    • Largest Money Managers
    • DC Money Managers
    • DC Record Keepers
    • Largest Hedge Fund Managers
    • World's Largest Retirement Funds
    • Best Places to Work in Money Management
    • Excellence & Innovation Awards
    • WPS Innovation Awards
    • Influential Women in Institutional Investing 2023
    • Eddy Awards
  • ETFs
    • Latest ETF News
    • Fund Screener
    • Education Center
    • Equities
    • Fixed Income
    • Commodities
    • Actively Managed
    • Alternatives
    • ESG Rated
  • ESG
    • Latest ESG News
    • The Institutional Investor’s Guide to ESG Investing
    • ESG Sustainability - Gaining Momentum
    • ESG Investing | Industry Brief
    • Innovation in ESG Investing
    • 2023 ESG Investing Conference
    • ESG Rated ETFs
    • Divestment Database
  • Defined Contribution
    • Latest DC News
    • The Plan Sponsor's Guide to Retirement Income
    • DC Money Manager Rankings
    • DC Record Keeper Rankings
    • Innovations in DC
    • DC Plan Design: Improving Participant Outcomes
    • 2023 Defined Contribution East Conference
  • Searches & Hires
    • Latest Searches & Hires News
    • Searches & Hires Database
    • RFPs
  • Research Center
    • The P&I Research Center
    • Earnings Tracker
    • Endowment Returns Tracker
    • Corporate Pension Contribution Tracker
    • Pension Fund Returns Tracker
    • Pension Risk Transfer Database
  • Careers
  • Events
    • View All Conferences
    • View All Webinars
  • Print
Breadcrumb
  1. Home
  2. INDUSTRY VOICES
February 19, 2019 12:00 AM

Commentary: Inside the CTA black box

Heidi Raubenheimer
  • Tweet
  • Share
  • Share
  • Email
  • More

    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.

    Toward a better CTA benchmark

    The model, which the authors Gert Elaut and Peter Erdos call "adaptive time series momentum," teases out the underlying assets that trend-following managers use. The authors mined a large amount of short-term and longer-term signals from a long series (1990 to 2015) of futures data. These signals were then compared with monthly returns from CTA funds in the BarclayHedge database.

    The resulting performance measurement model is innovative, the authors argue, because drilling down to the asset level allows us to measure the strength of momentum signals from the prices of assets.

    In short, the authors create a performance measurement model that reflects the ways trend-following managers actually invest. That is, they tend to load up on developing trends and underweight trends as they start to fade. The model consequently mimics CTA performance, allowing identification of skilled CTA managers among their peers.

    How it's done

    As is well-known, a momentum signal in a CTA strategy typically occurs when the price of an asset moves above or below a moving average.

    However, by analyzing a large number of signals over a large number of time horizons, it should be possible to assess the strength of the signal rather than simply the direction of the signal, the authors argue. Capturing the strength of the signal is key to the ATSMOM strategy, which, the authors believe, is superior to the simpler time series momentum strategy. Adaptive time series momentum, which relies solely on binary long and short signals, traditionally has been the focus of attempts to measure and mimic performance in the CTA industry.

    The ATSMOM model looks across numerous asset classes, including commodities, equities, fixed income and foreign exchange. Critically, by focusing on the strength of signals, it allocates disproportionately to futures contracts that display clear trends.

    Revealing the contents of the black box

    The model uncovered evidence about the CTA industry that could be revelatory for investors.

    The study's focus on the underlying assets used by CTAs sheds valuable light on managers' allocation decisions. For instance, smaller CTAs allocate evenly across asset classes, but larger funds overweight the more liquid futures markets, such as fixed income.

    Indeed, the research found that CTAs tend to be exposed to fixed income most frequently, with exposure to fixed income being significant for 70% of the funds. Commodities, being significant in 64% of cases, made up the second most important exposure.

    The authors further discovered that fund size was negatively correlated with superior performance, whereas the age of a fund is positively correlated.

    Fund style also appears to be a factor. For example, funds that engage in pure trend-following approaches or higher equity momentum tend to generate superior performance.

    Meanwhile, the negligible impact of fund flows on this extra-benchmark performance suggests capacity constraints are not a big issue for CTA funds and their investors.

    Funds that charge higher management and performance fees might be expected to achieve higher returns. However, the study debunks this, at least for CTA strategies.

    Better benchmarking

    Most importantly, perhaps, the authors appear to have created a model that can improve benchmarking in the CTA industry.

    The study found that the adaptive time series momentum model is better at explaining CTA performance than other well-known models and benchmarks because it allocates more to higher-performing assets and limits drawdowns by more smoothly allocating less to lower-performing assets.

    The speed factor, which was identified in previous research, is the excess return found in funds that buy longer-horizon (slower to react) momentum CTA strategies and selling shorter-horizon ones. The speed factor has been the driving force behind a great many CTA strategies. If this speed factor is combined with the ATSMOM strategy, the combination can be seen to be responsible for 40% of the variation in individual CTA returns, the study showed.

    This, however, leaves 60% of their performance still unexplained. There are a large number of funds that display considerable alpha relative to the model. In fact, funds with positive alphas generated mean alphas of 4.8% a year. These positive alphas, the authors surmise, can reasonably be attributed to individual manager skill.

    What do we conclude? The study reveals many characteristics and return drivers of CTAs that have been obscure. It shows that a proposed ATSMOM model, when combined with the speed factor, is better at explaining CTA returns than existing benchmarks. This key finding should help investors to better understand CTA strategies and improve CTA manager selection.

    Heidi Raubenheimer is managing editor at the CFA Institute Financial Analysts Journal, Charlottesville, Va. This content represents the views of the author. It was submitted and edited under Pensions & Investments guidelines, but is not a product of P&I's editorial team.

    Related Articles
    Commentary: Do 'trend' risk premiums explain CTA performance?
    Commentary: Welcome to the machine
    NYC police and fire plans invest $134 million in exotic quant fund
    SEC, CFTC commissioners push for streamlined regulation
    Recommended for You
    Photo of One Digital's Peter Kent
    Commentary: Emerging market debt deserves a seat at the table
    Photo of Mavik Capital Management's Vik Uppal
    Commentary: CRE opportunities still abound — but bargain hunting demands discipline of value investing
    Photo of Los Angeles Capital Management's Hal Reynolds and Sidharth Madan
    Commentary: What's next for high-quality growth stocks?
    Open Window of Opportunity in Real Estate
    Sponsored Content: Open Window of Opportunity in Real Estate
    Sponsored
    White Papers
    What a Fed pivot and ‘higher for longer’ mean for emerging markets
    A Guide to Home Equity Investments: The Untapped Real Estate Asset Class
    How to Modernize a School District Retirement Plan
    Q4 2023 Credit Outlook: Price Is What You Pay, Value Is What You Get
    There's More Than One Way to Be a Climate Investor
    Exploring the Commercial Application of Artificial Intelligence
    View More
    Sponsored Content
    Partner Content
    The Industrialization of ESG Investment
    For institutional investors, ETFs can make meeting liquidity needs easier
    Gold: the most effective commodity investment
    2021 Investment Outlook | Investing Beyond the Pandemic: A Reset for Portfolios
    Ten ways retirement plan professionals add value to plan sponsors
    Gold: an efficient hedge
    View More
    E-MAIL NEWSLETTERS

    Sign up and get the best of News delivered straight to your email inbox, free of charge. Choose your news – we will deliver.

    Subscribe Today
    October 23, 2023 page one

    Get access to the news, research and analysis of events affecting the retirement and institutional money management businesses from a worldwide network of reporters and editors.

    Subscribe
    Connect With Us
    • RSS
    • Twitter
    • Facebook
    • LinkedIn

    Our Mission

    To consistently deliver news, research and analysis to the executives who manage the flow of funds in the institutional investment market.

    About Us

    Main Office
    685 Third Avenue
    Tenth Floor
    New York, NY 10017-4036

    Chicago Office
    130 E. Randolph St.
    Suite 3200
    Chicago, IL 60601

    Contact Us

    Careers at Crain

    About Pensions & Investments

     

    Advertising
    • Media Kit
    • P&I Custom Content
    • P&I Careers | Post a Job
    • Reprints & Permissions
    Resources
    • Subscribe
    • Newsletters
    • FAQ
    • P&I Research Center
    • Site map
    • Staff Directory
    Legal
    • Privacy Policy
    • Terms and Conditions
    • Privacy Request
    Pensions & Investments
    Copyright © 1996-2023. Crain Communications, Inc. All Rights Reserved.
    • Topics
      • Alternatives
      • Artificial Intelligence
      • Consultants
      • Defined Contribution
      • ESG
      • ETFs
      • Face to Face
      • Hedge Funds
      • Industry Voices
      • Investing
      • Money Management
      • Partner Content
      • Pension Funds
      • Private Equity
      • Real Estate
      • Regulation
      • SECURE 2.0
      • Special Reports
      • Washington
      • White Papers
    • Rankings & Awards
      • 1,000 Largest Retirement Plans
      • Top-Performing Managers
      • Largest Money Managers
      • DC Money Managers
      • DC Record Keepers
      • Largest Hedge Fund Managers
      • World's Largest Retirement Funds
      • Best Places to Work in Money Management
      • Excellence & Innovation Awards
      • WPS Innovation Awards
      • Influential Women in Institutional Investing 2023
      • Eddy Awards
    • ETFs
      • Latest ETF News
      • Fund Screener
      • Education Center
      • Equities
      • Fixed Income
      • Commodities
      • Actively Managed
      • Alternatives
      • ESG Rated
    • ESG
      • Latest ESG News
      • The Institutional Investor’s Guide to ESG Investing
      • ESG Sustainability - Gaining Momentum
      • ESG Investing | Industry Brief
      • Innovation in ESG Investing
      • 2023 ESG Investing Conference
      • ESG Rated ETFs
      • Divestment Database
    • Defined Contribution
      • Latest DC News
      • The Plan Sponsor's Guide to Retirement Income
      • DC Money Manager Rankings
      • DC Record Keeper Rankings
      • Innovations in DC
      • DC Plan Design: Improving Participant Outcomes
      • 2023 Defined Contribution East Conference
    • Searches & Hires
      • Latest Searches & Hires News
      • Searches & Hires Database
      • RFPs
    • Research Center
      • The P&I Research Center
      • Earnings Tracker
      • Endowment Returns Tracker
      • Corporate Pension Contribution Tracker
      • Pension Fund Returns Tracker
      • Pension Risk Transfer Database
    • Careers
    • Events
      • View All Conferences
      • View All Webinars
    • Print