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

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. To illustrate the difficulty of modelling the strategies we specify recently identified alternative risk premia from the academic literature 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 suggest that, given the heterogeneity of CTAs, while these new products may deliver on liquidity, transparency and fees, investors expecting hedge fund/CTA - like returns may be disappointed