Fooling Some of the People All of the Time: The Inefficient Performance and Persistence of Commodity Trading Advisors

Geetesh Bhardwaj (), Gary Gorton and K. Rouwenhorst

No 14424, NBER Working Papers from National Bureau of Economic Research, Inc

Abstract: Investors face significant barriers in evaluating the performance of hedge funds and commodity trading advisors (CTAs). The only available performance data comes from voluntary reporting to private companies. Funds have incentives to strategically report to these companies, causing these data sets to be severely biased. And, because hedge funds use nonlinear, state-dependent, leveraged strategies, it has proven difficult to determine whether they add value relative to benchmarks. We focus on commodity trading advisors, a subset of hedge funds, and show that during the period 1994-2007 CTA excess returns to investors (i.e., net of fees) averaged 85 basis points per annum over US T-bills, which is insignificantly different from zero. We estimate that CTAs on average earned gross excess returns (i.e., before fees) of 5.4%, which implies that funds captured most of their performance through charging fees. Yet, even before fees we find that CTAs display no alpha relative to simple futures strategies that are in the public domain. We argue that CTAs appear to persist as an asset class despite their poor performance, because they face no market discipline based on credible information. Our evidence suggests that investors' experience of poor performance is not common knowledge.

JEL-codes: G12 G13 (search for similar items in EconPapers)
Date: 2008-10
Note: AP CF
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (12)

Published as Geetesh Bhardwaj & Gary B. Gorton & K. Geert Rouwenhorst, 2014. "Fooling Some of the People All of the Time: The Inefficient Performance and Persistence of Commodity Trading Advisors," Review of Financial Studies, vol 27(11), pages 3099-3132.

Downloads: (external link)
http://www.nber.org/papers/w14424.pdf (application/pdf)

Related works:
This item may be available elsewhere in EconPapers: Search for items with the same title.

Export reference: BibTeX RIS (EndNote, ProCite, RefMan) HTML/Text

Persistent link: https://EconPapers.repec.org/RePEc:nbr:nberwo:14424

Ordering information: This working paper can be ordered from
http://www.nber.org/papers/w14424

Access Statistics for this paper

More papers in NBER Working Papers from National Bureau of Economic Research, Inc National Bureau of Economic Research, 1050 Massachusetts Avenue Cambridge, MA 02138, U.S.A.. Contact information at EDIRC.
Bibliographic data for series maintained by ().