Taxonomy of CTAs

Related to all CTA strategies:

Title: Just a One Trick Pony? An Analysis of CTA Risk and Return

Link: http://papers.ssrn.com/sol3/papers.cfm?abstract_id=2791960

Abstract:

Recently a range of alternative risk premia products have been developed promising investors hedge fund/CTA like returns with higher liquidity, transparency and relatively low fees. The attractiveness of these products rests on the assumption that they can deliver similar returns. Using a novel reporting bias free sample of 3,419 CTA funds as a testing ground, our results suggest this assumption is questionable. We find that CTAs are not a homogenous group. We identify eight different CTA sub-strategies, each with very different sources of return and low correlation between sub-strategies. When we specify recently identified alternative risk premia as factors to examine the sources of return of CTAs, we find that these premia fail to explain between 56% and 86% of returns. Our results for CTAs suggest that while these new products may deliver on liquidity, transparency and fees, investors expecting hedge fund CTA – like returns may be disappointed.

Notable quotations from the academic research paper:

"Our first finding is that CTAs are in fact very different from each other. We utilise statistical clustering techniques to identify different types of CTA and classify them into eight sub-strategies. The different sub-strategies generally have low cross correlation and generate their returns from very different sources. Our second key finding is that alternative risk premia do not explain a large proportion of CTA returns.

We use the BarclayHedge CTA database as our source of CTA returns data due to its depth of coverage.

Our sample is divided into eight clusters following Brown and Goetzmann (1997). We carry out clustering as an iterative process. Funds are first assigned to initial clusters. Next we calculate the time series of the average cross sectional returns of each cluster. The next step is to estimate the correlation between each fund’s return and each cluster’s return. Using these correlations we reassign funds to the cluster with which they have the highest correlation. The process is repeated until no funds change cluster.

The largest category, by number of funds, is Diversified Trend which is comprised mainly of the BarclayHedge “Technical-Diversified” category, while the smallest grouping is Fundamental Carry, which has quite a large spread of BarclayHedge categories but is positively correlated to the carry alternative risk premium. Longer Term Trend is comprised principally of BarclayHedge “Technical-Diversified” category but is correlated with the time series momentum alternative risk premium which is a relatively longer duration signal, whereas Shorter Term Trend is correlated with the option risk premium which captures shorter term trend following effects. Fundamental Value is correlated with the Value risk premium, with a negative Carry relationship, whereas Fundamental Diversified is comprised principally of BarclayHedge “Fundamental – Diversified” category funds. Option Strategies: Short is made up predominantly of BarclayHedge “Option Strategies” funds. Finally, Discretionary funds are comprised of a mixture of technical and fundamental funds, with no obvious match to the BarclayHedge categories or the alternative risk premia.

In this paper we use four alternative risk premia to capture the sources of CTA returns – Value, Carry, Time-Series Momentum and Option Strategies.

We present an analysis dividing the returns of CTA clusters into alternative risk premia exposure and alpha. Looking first at the equal weighted clusters, the explanatory power of the models is modest with adjusted R2 range from 14% to 44%. All of the clusters have a statistically significant relationship with at least one of the alternative risk premia. Longer Term Trend, Fundamental Value, Fundamental Carry and Option Strategies all have positive value exposure, while only Fundamental Diversified is negatively related to value. Fundamental Diversified, Fundamental Carry and Option Strategies are all positively related to carry, whereas Fundamental Value has a negative carry coefficient. The third alternative risk premium, time series momentum, is positively related to Diversified Trend, Longer Term Trend and Option Strategies"


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