CHAPTER 6 The Performance of CTAs in Changing Market Conditions. This chapter studies the performance of 6 CTA indices during the period 1990 to 2003. Four distinct phases of financial markets are isolated, as well as three extreme events. | 6 The Performance of CTAs in Changing Market Conditions Georges Hübner and Nicolas Papageorgiou This chapter studies the performance of 6 CTA indices during the period 1990 to 2003. Four distinct phases of financial markets are isolated as well as three extreme events. We show that traditional multifactor as well as multimoment asset pricing models do not adequately describe CTA returns for any of the subperiods. With a proper choice of risk factors we can however explain a significant proportion of CTA returns and assess the abnormal performance of each strategy. Most indices display null or negative alphas but they seem to exhibit positive market timing abilities. The currency index reports both types of positive performance during the first subperiod. Severe market crises do not seem to affect abnormal CTA returns except the Asian crisis which benefited investors in the discretionary index. The Russian crisis has a uniform although insignificant negative impact on CTA abnormal returns. INTRODUCTION Since the blossoming of an extensive literature on hedge funds commodity trading advisors CTAs have profited from renewed interest among researchers. Following the initial studies by Brorsen and Irwin 1985 and Murphy 1986 Elton Gruber and Rentzler 1987 ascertained that commodity funds were not likely to provide a superior return to passively managed portfolios of stocks and bonds. As a result of these discouraging findings for over a decade very little research was devoted to the analysis of CTAs. Fung and Hsieh s paper 1997a on the analysis of hedge fund performance rekindled academic interest in CTAs. In their paper the authors notice that the return distributions of certain hedge funds share some important 105 106 PERFORMANCE characteristics with those of CTAs. Subsequently Schneeweis and Spurgin 1997 Brown Goetzmann and Park 2001 and Edwards and Caglayan 2001 performed studies on a joint sample of CTA and hedge fund data. Fung and Hsieh 1997b analyzed these two .
