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Commodity Trading Advisors: Risk, Performance Analysis, and Selection Chapter 17

CHAPTER 17 CTAs and Portfolio Diversification: A Study through Time. The standard mean/variance framework and the concept of efficient frontiers are one way of assessing the portfolio added value of a hedge fund strategy such as CTAs. However, even if it provides interesting results | 17 CTAs and Portfolio Diversification A Study through Time Nicolas Laporte The standard mean variance framework and the concept of efficient frontiers are one way of assessing the portfolio added value of a hedge fund strategy such as CTAs. However even if it provides interesting results this framework is a two-dimensional one and it gives a static vision of the CTAs industry. Changes in correlation or volatility over time are ignored. To provide a more dynamic approach this chapter presents a three-dimensional framework with time as the third variable. It assesses the evolution of the CTAs diversification abilities in a portfolio environment over the last decade. INTRODUCTION Commodity trading advisors CTAs are professional money managers. They manage the assets of their clients using derivative instruments futures forwards and options on commodities and money markets around the world. As an asset category in the alternative investment industry they are classified as managed futures. CTAs strategies range from systematic models to discretionary approaches the first one being the most common. CTAs are most of the time considered trend followers. Even though CTAs have existed for a while only a few studies have been published about them. The term CTAs appears regularly in publications but most of the time is far from being the main topic. Usually CTAs are mentioned because of their affiliation to the hedge fund industry. Looking at the practitioner side the same conclusion can be made. 307 308 PROGRAM EVALUATION SELECTION AND RETURNS Although it is true that most of the financial players are familiar with CTAs CTAs in fact have the reputation of being low negatively correlated to any asset family including hedge funds most of the time this interesting feature is all they know about them. Based on these findings it is interesting to propose a study focusing uniquely on the CTA industry with as main objective the definition of their added value in portfolio .