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

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

Abstract

Investors face significant barriers in evaluating the performance of investment advisors. We focus on commodity trading advisors (CTAs) and show that from 1994 to 2012, CTA excess returns to investors (i.e., net of fees) were insignificantly different from zero while gross excess returns (i.e., before fees) were 6.1%, which implies that managers captured the performance in fees. Moreover, we find that CTAs display no alpha relative to simple future strategies in the public domain. Our results have implications for all hedge fund studies in that we find the typical adjustments for biases in the hedge fund databases still leave upward bias in fund performance.

Suggested Citation

  • Geetesh Bhardwaj & Gary B. Gorton & K. Geert Rouwenhorst, 2014. "Editor's Choice Fooling Some of the People All of the Time: The Inefficient Performance and Persistence of Commodity Trading Advisors," The Review of Financial Studies, Society for Financial Studies, vol. 27(11), pages 3099-3132.
    • Handle: RePEc:oup:rfinst:v:27:y:2014:i:11:p:3099-3132.
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    Cited by:

    1. Itzhak Ben-David & Justin Birru & Andrea Rossi, 2020. "The Performance of Hedge Fund Performance Fees," NBER Working Papers 27454, National Bureau of Economic Research, Inc.
    2. John Hua Fan & Adrian Fernandez‐Perez & Ana‐Maria Fuertes & Joëlle Miffre, 2020. "Speculative pressure," Journal of Futures Markets, John Wiley & Sons, Ltd., vol. 40(4), pages 575-597, April.
    3. Malakhov, Alexey & Riley, Timothy B. & Yan, Qing, 2024. "Do hedge funds bet against beta?," International Review of Economics & Finance, Elsevier, vol. 93(PA), pages 1507-1525.
    4. Marcel Prokopczuk & Chardin Wese Simen & Robert Wichmann, 2021. "The dynamics of commodity return comovements," Journal of Futures Markets, John Wiley & Sons, Ltd., vol. 41(10), pages 1597-1617, October.
    5. Marat Molyboga & Seungho Baek & John F. O. Bilson, 2017. "Assessing hedge fund performance with institutional constraints: evidence from CTA funds," Journal of Asset Management, Palgrave Macmillan, vol. 18(7), pages 547-565, December.
    6. David Batista Soares & Etienne Borocco, 2022. "Rational destabilization in commodity markets [Déstabilisation rationnelle des marchés de matières premières]," Post-Print hal-03256534, HAL.
    7. Gert Elaut & Michael Frömmel & Alexander Mende, 2017. "Duration Dependence, Behavioral Restrictions, and the Market Timing Ability of Commodity Trading Advisors," International Review of Finance, International Review of Finance Ltd., vol. 17(3), pages 427-450, September.
    8. Jesse Blocher & Marat Molyboga, 2017. "The Revealed Preference of Sophisticated Investors," European Financial Management, European Financial Management Association, vol. 23(5), pages 839-872, October.
    9. Zhang, Xuan & Xiao, Jun & Zhang, Zhekai, 2020. "An anatomy of commodity futures returns in China," Pacific-Basin Finance Journal, Elsevier, vol. 62(C).
    10. Hutchinson, Mark C. & O'Brien, John, 2020. "Time series momentum and macroeconomic risk," International Review of Financial Analysis, Elsevier, vol. 69(C).
    11. Sinclair, Andrew J., 2023. "Do prime brokers intermediate capital?," Journal of Financial Intermediation, Elsevier, vol. 53(C).
    12. Asif, Raheel & Frömmel, Michael & Mende, Alexander, 2022. "The crisis alpha of managed futures: Myth or reality?," International Review of Financial Analysis, Elsevier, vol. 80(C).
    13. Batista Soares, David & Borocco, Etienne, 2022. "Rational destabilization in commodity markets," Journal of Commodity Markets, Elsevier, vol. 25(C).
    14. Jesse Blocher & Ricky Cooper & Marat Molyboga, 2018. "Benchmarking commodity investments," Journal of Futures Markets, John Wiley & Sons, Ltd., vol. 38(3), pages 340-358, March.
    15. Zhang, Hanxiong & Auer, Benjamin R. & Vortelinos, Dimitrios I., 2018. "Performance ranking (dis)similarities in commodity markets," Global Finance Journal, Elsevier, vol. 35(C), pages 115-137.
    16. Lu, Yan & Mortal, Sandra & Ray, Sugata, 2022. "Hedge fund hold ’em," Journal of Financial Markets, Elsevier, vol. 57(C).
    17. Hao Liang & Lin Sun & Melvyn Teo, 2022. "Responsible Hedge Funds [Role of managerial incentives and discretion in hedge fund performance]," Review of Finance, European Finance Association, vol. 26(6), pages 1585-1633.
    18. Scott H. Irwin & Dwight R. Sanders & Aaron Smith & Scott Main, 2020. "Returns to Investing in Commodity Futures: Separating the Wheat from the Chaff," Applied Economic Perspectives and Policy, John Wiley & Sons, vol. 42(4), pages 583-610, December.
    19. Sun, Lin & Teo, Melvyn, 2019. "Public hedge funds," Journal of Financial Economics, Elsevier, vol. 131(1), pages 44-60.
    20. William Fung & David Hsieh & Narayan Naik & Melvyn Teo, 2021. "Hedge Fund Franchises," Management Science, INFORMS, vol. 67(2), pages 1199-1226, February.
    21. Michael Hachula & Malte Rieth, 2017. "Identifying Speculative Demand Shocks in Commodity Futures Markets through Changes in Volatility," Discussion Papers of DIW Berlin 1646, DIW Berlin, German Institute for Economic Research.
    22. Nicolas P. B. Bollen & Mark C. Hutchinson & John O'Brien, 2021. "When it pays to follow the crowd: Strategy conformity and CTA performance," Journal of Futures Markets, John Wiley & Sons, Ltd., vol. 41(6), pages 875-894, June.
    23. Kosowski, Robert & Joenväärä, Juha & Kaupila, Mikko & Tolonen, Pekka, 2019. "Hedge Fund Performance: Are Stylized Facts Sensitive to Which Database One Uses?," CEPR Discussion Papers 13618, C.E.P.R. Discussion Papers.

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