Performance, Risk and Persistence of the CTA Industry : Systematic vs. Discretionary CTAs

This study investigates risk, performance and persistence of systematic and discretionary CTAs. Before analyzing the average performance this study updates previous results in the CTA literature on database biases and finds that results remain largely unaffected by the recent crisis. Controlling for these biases, this study finds that after fees the average CTA is able to add value. These results are strongest however for large systematic CTAs. I model the risk of CTAs by extending the seven-factor model of Fung-Hsieh (2004a) and find that this model is better able to explain the returns of systematic rather than discretionary CTAs. I find three structural breaks in the risk loadings of CTAs: September 1998, March 2003 and July 2007. Using these breaks I show that systematic CTAs were able to deliver significant alpha in every subperiod. I further investigate performance persistence and find evidence of significant performance persistence for the aggregate group of CTAs. However, these findings are heavily contingent on the strategy followed: the persistence of discretionary CTAs is driven by small funds whereas large funds drive the performance persistence of systematic funds. These results have important implications for institutional investors who face capital allocation constraints. They also suggest that contrary to the previous findings, CTA industry does not appear to be heading towards zero alpha