TY  - JOUR
AU  - Bhardwaj,Geetesh
AU  - Gorton,Gary B.
AU  - Rouwenhorst,K. Geert
TI  - Fooling Some of the People All of the Time: The Inefficient Performance and Persistence of Commodity Trading Advisors
JF  - National Bureau of Economic Research Working Paper Series
VL  - No. 14424
PY  - 2008
Y2  - October 2008
UR  - http://www.nber.org/papers/w14424
L1  - http://www.nber.org/papers/w14424.pdf
N1  - Author contact info:
Geetesh Bhardwaj
Vice President
AIG Financial Products
and Rutgers University
Department of Economics
75 Hamilton Street
New Brunswick, NJ 08901
E-Mail: geetesh.bhardwaj@gmail.com

Gary B. Gorton
Yale School of Management
135 Prospect Street
P.O. Box 208200
New Haven, CT 06520-8200
Fax: 203/432-8931
E-Mail: Gary.Gorton@yale.edu

K. Geert Rouwenhorst
School of Management
Yale University
Box 208200
New Haven, CT 06520-8200
E-Mail: k.rouwenhorst@yale.edu
AB  - 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.
ER  -