Commodity Trading Advisor Indexes And Alpha Generation Relationships

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Scott Mackey

Keywords

Commodity Trading Advisors Trend Following Relationships, Commodity Trading Advisors Performance, Commodity Trading Advisors Alpha

Abstract

This research investigates the trend following relationships between Commodity Trading Advisor (CTA) Indexes and a widely known trend following proxy Index using a database covering 21 years with 24 CTA, Managed Futures, and Hedge Fund (that can trade CTA-like) Indexes.  The trend following relationships are tested using a modification of the Methodology employed by Baesel, Gonzalez-Heres, Chen, & Shin (2012).  A unique Alpha adjustment is proposed to include the traditional Alpha plus or minus a reward or penalty for displaying relationships to the larger positive and negative returns of the trend following Index proxy.  Results for the first sample period show evidence of at least some association of the returns of the trend following proxy to those of the individual CTA Indexes; however, most of the Indexes showed little to no statistical support for much traditional or adjusted Total Alpha generation.  For the second sample period the regression results show that almost none of the Indexes had a statistically significant association with the monthly total returns of the trend following proxy Index.  Instead, generally all of the Indexes showed the impact of the larger monthly returns of the trend following proxy Index such that the Alpha adjustments overall were positive and, on average, generated approximately 50% of the Total Alpha of the individual CTA Indexes.

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