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

37 Pages Posted: 23 Oct 2008 Last revised: 1 Dec 2022

See all articles by Geetesh Bhardwaj

Geetesh Bhardwaj

Walleye Capital

Gary B. Gorton

Yale School of Management; National Bureau of Economic Research (NBER); Yale University - Yale Program on Financial Stability

K. Geert Rouwenhorst

Yale School of Management - International Center for Finance

Multiple version iconThere are 2 versions of this paper

Date Written: October 2008

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.

Suggested Citation

Bhardwaj, Geetesh and Gorton, Gary B. and Rouwenhorst, K. Geert, Fooling Some of the People All of the Time: The Inefficient Performance and Persistence of Commodity Trading Advisors (October 2008). NBER Working Paper No. w14424, Available at SSRN: https://ssrn.com/abstract=1288423

Geetesh Bhardwaj

Walleye Capital ( email )

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Gary B. Gorton (Contact Author)

Yale School of Management ( email )

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HOME PAGE: http://mba.yale.edu/faculty/profiles/gorton.shtml

National Bureau of Economic Research (NBER)

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Yale University - Yale Program on Financial Stability

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K. Geert Rouwenhorst

Yale School of Management - International Center for Finance ( email )

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United States
203-432-6046 (Phone)
203-432-8931 (Fax)

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