Survival of Commodity Trading Advisors: Systematic vs. Discretionary CTAs

Abstract

This study investigates the differences in mortality between systematic and discretionary Commodity Trading Advisors, CTAs, over 1994-2009 period, the longest horizon than any encompassed in the literature. This study shows that liquidation is not the same as failure in the CTA industry. New filters are proposed that allow to identify real failures among funds in the graveyard database. By reexamining the attrition rate, this study finds that the real failure rate is in fact 11.1% in the CTA industry lower than the average yearly attrition rate of 17.3%. Secondly this study proposes a new way to classify CTAs, mainly into systematic and discretionary funds and provides detailed analysis of their survival. Systematic CTAs are found to have higher median survival than discretionary, 12 years vs. 8 years. The effect of various covariates including several downside risk measures is investigated in predicting CTA failure. Controlling for performance, HWM, minimum investment, fund age, leverage and lockup, funds with higher downside risk measures have a higher hazard rate. Compared to the other downside risk measures, volatility of returns is less able to predict failure. Fund flows have significant and positive effect on the probability of survival, funds that receive larger inflows are able to survive longer than funds that do not. Finally larger systematic CTAs have the highest probability of survival.

Keywords: CTA failure, liquidation, median survival, attrition rate, downside risk, systematic, diretionary

JEL Classification: G11, G12, C31