NATIONAL BUREAU OF ECONOMIC RESEARCH
NATIONAL BUREAU OF ECONOMIC RESEARCH

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

Geetesh Bhardwaj, Gary B. Gorton, K. Geert Rouwenhorst

NBER Working Paper No. 14424
Issued in October 2008
NBER Program(s):   AP   CF

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.

download in pdf format
   (254 K)

email paper

This paper is available as PDF (254 K) or via email.

Machine-readable bibliographic record - MARC, RIS, BibTeX

Document Object Identifier (DOI): 10.3386/w14424

Users who downloaded this paper also downloaded these:
Gorton, Hayashi, and Rouwenhorst w13249 The Fundamentals of Commodity Futures Returns
Gorton and Rouwenhorst w10595 Facts and Fantasies about Commodity Futures
Erb and Harvey w11222 The Tactical and Strategic Value of Commodity Futures
Tang and Xiong w16385 Index Investment and Financialization of Commodities
Acharya, Lochstoer, and Ramadorai w16875 Limits to Arbitrage and Hedging: Evidence from Commodity Markets
 
Publications
Activities
Meetings
NBER Videos
Data
People
About

Support
National Bureau of Economic Research, 1050 Massachusetts Ave., Cambridge, MA 02138; 617-868-3900; email: info@nber.org

Contact Us