CHAPTER
6
The Performance of CTAs
in Changing Market Conditions
Georges Hübner and Nicolas Papageorgiou
T
his chapter studies the performance of 6 CTA indices during the period
1990 to 2003. Four distinct phases of financial markets are isolated, as
well as three extreme events. We show that traditional multifactor as well
as multimoment asset pricing models do not adequately describe CTA
returns for any of the subperiods. With a proper choice of risk factors, we
can, however, explain a significant proportion of CTA returns and assess
the abnormal performance of each strategy. Most indices display null or
negative alphas, but they seem to exhibit positive market timing abilities.
The currency index reports both types of positive performance during the
first subperiod. Severe market crises do not seem to affect abnormal CTA
returns, except the Asian crisis, which benefited investors in the discre-
tionary index. The Russian crisis has a uniform, although insignificant,
negative impact on CTA abnormal returns.
INTRODUCTION
Since the blossoming of an extensive literature on hedge funds, commodity
trading advisors (CTAs) have profited from renewed interest among
researchers. Following the initial studies by Brorsen and Irwin (1985) and
Murphy (1986), Elton, Gruber, and Rentzler (1987) ascertained that com-
modity funds were not likely to provide a superior return to passively man-
aged portfolios of stocks and bonds. As a result of these discouraging
findings, for over a decade very little research was devoted to the analysis
of CTAs.
Fung and Hsieh’s paper (1997a) on the analysis of hedge fund perform-
ance rekindled academic interest in CTAs. In their paper the authors notice
that the return distributions of certain hedge funds share some important

aspect of these measures is that they do not require prior knowledge of the
underlying return-generating process, which eliminates most of the difficul-
ties associated with the discovery of a proper pricing model for CTAs.
In this chapter we test a joint set of pricing models and performance
measures that aim to better capture the distributional features of CTAs. The
identification of risk premia and of the sensitivities of CTA returns to
these factors will clear the way toward the use of less utility-based per-
formance measures than the Sharpe ratio and to a more proper use of sto-
chastic discount factor–based performance measures, such as Jensen’s
alpha, the Treynor ratio, or the Treynor and Mazuy (1966) measure of mar-
ket timing ability.
The next section of this chapter examines the market trends and crises
over the sample period and presents the descriptive statistics of the CTA
index returns. An examination of the explanatory power of market factors
106 PERFORMANCE
c06_gregoriou.qxd 7/27/04 11:09 AM Page 106
as well as trading strategy factors in describing CTA returns follows. The
next section looks at different performance measures on the CTAs.
DATA AND SAMPLE PERIOD
The data set that we use is the Barclay’s Trading group CTA data for the
period from January 1990 to November 2003. The data set is composed
of end-of-month returns for the CTA index as well as for five subindices
1
:
the Barclay Currency Traders Index, the Barclay Financial and Metal
Traders Index, the Barclay Systematic Traders Index, the Barclay Diversi-
fied Traders Index, and the Barclay Discretionary Traders Index.
We divide the sample period into subperiods to investigate the behav-
ior of the CTA indices under specific market conditions (see Table 6.1).
The Performance of CTAs in Changing Market Conditions 107

considerably different over the two periods. The fourth and final subpe-
riod that we investigate is the “Bear Market” that lasted from March 2000
to September 2002, during which time the annualized return on the S&P
500 was −22.6 percent.
Three significant market crises occur during our sample period, each of
which caused a significant short-term drop in the market. Predictably, these
three crises are the Russian default, the Asian currency crisis, and Septem-
ber 11 terrorist attacks. Interestingly, the magnitude and duration of these
three shocks on the S&P 500 is very similar. Each event triggered a drop in
the S&P 500 of about 15 percent, and the time required for the index to
return to its preevent level was generally two to three months. The three
crises occur in two different subperiods: “Moderate Bull” and “Bear.”
Table 6.2 presents the descriptive statistics for the excess returns on
the CTA indices for the entire period as well as for the four subperiods.
Although each individual CTA index has certain intrinsic characteristics,
certain general properties appear to be common to all the CTAs in our sam-
ple. More specifically, the Jarque-Bera tests over the entire sample period
illustrate that all the CTA indices, with the sole exception of the diversified
index, exhibit nonnormality in their excess returns. Another common trait
is the very poor results during the “Strong Bull” period: all the CTA indices
display negative excess returns for this period of very high returns in the
stock markets. As a matter of fact, this is unanimously the worst subperiod
in terms of performance for all the CTA indices. These results are in accor-
dance with previous findings by Edwards and Caglayan (2001) and Liang
(2003), who identified the poor performance of CTAs in bull markets. A
further examination of the mean excess returns over the four subperiods
reveals that for all the CTA indices, the highest excess returns are achieved
in “Weak Bull,” which includes the recession of the early 1990s, and
“Bear,” which followed the collapse of the dot-com bubble. This would
seem to concur with the notion that CTAs possess valuable return charac-

Mean Median Max Min Std. Dev. Skewness Kurtosis J-B
0.46 0.06 11.71 −7.35 3.61 0.35 2.99 3.46
0.73 0.17 11.71 −7.02 4.07 0.41 2.90 1.37
Diversified 0.46 0.07 9.76 −6.88 3.51 0.38 2.93 1.36
Traders Index −0.52 −0.54 3.18 −5.77 2.43 −0.23 2.35 0.47
0.64 0.53 7.97 −6.01 3.40 0.18 2.67 0.29
−0.02 −0.05 7.85 −3.26 1.44 1.07 7.63 181
**
0.29 −0.03 7.85 −3.26 1.71 1.71 9.33 103
**
Discretionary −0.30 −0.48 3.92 −2.61 1.33 0.68 3.71 5.56
*
Traders Index −0.35 −0.03 1.80 −2.88 1.30 −0.48 2.55 0.84
0.07 0.06 3.67 −3.07 1.42 0.23 3.17 0.31
0.37 −0.35 14.37 −7.99 3.30 1.41 6.44 138
**
1.04 0.40 14.37 −7.99 5.22 0.79 2.97 4.96
*
Currency 0.08 −0.44 6.99 −4.07 2.29 0.92 3.67 9.09
**
Traders Index −0.22 −0.55 2.76 −1.82 1.39 0.71 2.31 1.87
0.12 −0.39 6.29 −2.41 2.09 1.44 4.42 12.95
**
Excess returns are calculated as the difference between the returns on the CTA indices and the return on the 3-month treasury bill
over the same period.
**
The values are significant at the 10 percent level.
**
The values are significant at the 5 percent level.
110

period under study.
Multifactor Model
We start with the four-factor model proposed by Carhart (1997), but
exclude the factor mimicking the value premium, namely the “High minus
Low” (HML) book-to-market value of equity, that yields significant results
for none of our regressions. This factor is replaced by an additional factor
related to the risk premium associated with high-yield dividend-paying
stocks. Although there is only limited and controversial evidence of the
actual value added of this factor in the explanation of empirical returns,
Kunkel et al. (1999) find that there is a significant empirical return compo-
The Performance of CTAs in Changing Market Conditions 111
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TABLE 6.3 Correlations between Excess Returns on CTA Indices and Russell 3000
CTA Fin. and
Index Systematic Metal Diversified Discretionary Currency Russell Russell
2
Entire Period
CTA Index 1
Systematic 0.98 1
Fin/Met 0.89 0.89 1
Diversified 0.98 0.97 0.85 1
Discretionary 0.57 0.50 0.47 0.56 1
Currency 0.68 0.74 0.63 0.63 0.39 1
Russell −0.20 −0.19 −0.18 −0.23 −0.07 −0.10 1
Russell
2
0.25 0.25 0.30 0.28 0.16 0.09 −0.34 1
Weak Bull Market
CTA Index 1
Systematic 0.97 1

Diversified 0.98 0.98 0.78 1
Discretionary 0.59 0.47 0.41 0.52 1
Currency 0.38 0.36 0.38 0.26 0.30 1
Russell −0.22 −0.24 0.01 −0.26 −0.10 −0.10 1
Russell
2
−0.11 −0.13 0.18 −0.15 0.01 −0.10 0.66 1
Bear Market
CTA Index 1
Systematic 0.99 1
Fin/Met 0.95 0.95
Diversified 0.99 0.99 0.92 1
Discretionary 0.33 0.26 0.29 0.30 1
Currency 0.67 0.64 0.61 0.60 0.30 1
Russell −0.37 −0.35 −0.41 −0.36 0.19 −0.18 1
Russell
2
0.19 0.19 0.18 0.24 −0.08 −0.02 −0.59 1
113
c06_gregoriou.qxd 7/27/04 11:09 AM Page 113
nent associated with high-yield dividend-paying stocks, which is explained
in Martin and van Zijl (2003) by a tax differential argument. The equation
for the market model is:
r
t
= a + b
1
Mkt
t
+ b

t
= difference between equally weighted monthly returns of
the top 30 percent quantile stocks ranked by dividend
yields and of the zero-dividend yield stocks (“High
Dividend Minus Low Dividend”).
Factors are extracted from French’s web site (http://mba.tuck.dartmouth.
edu/pages/faculty/ken.french/data_library.html). Table 6.4 summarizes the
results of this regression over the entire period and the four subperiods.
For all but one subperiod (Weak Bull), the adjusted R-squared coeffi-
cients are extremely low and often negative. The only statistically signifi-
cant linear relationship is observed for the Weak Bull subperiod, while the
model is unable to explain anything during the Strong Bull subperiod. The
significance of the regressions is especially poor for the Discretionary and
Currency strategies, whose different pattern of returns had already been
observed through their correlation structure. During the period from 1990
to 1993, it appears that only the coefficient of the dividend factor is signif-
icantly positive for all indices except the Discretionary Index.
2
These rather weak results confirm the inaccuracy of classical multifac-
tor models for the assessment of required returns of commodity trading
advisors. This is in contrast with pervasive evidence of the ability of the
Carhart (1997) model to explain up to an average of 60 percent of the vari-
ance of hedge funds strategies (see Capocci, Corhay, and Hübner, 2003;
Capocci and Hübner, 2004), providing further evidence of the completely
different return dynamics of these financial instruments.
114 PERFORMANCE
2
Of course, the replacement of this risk premium, the only one that seems to have
explanatory power, by the traditional HML factor would have yielded even lower
adjusted R-squared.

−0.063 0.058 0.014 −0.110 −0.280
b
2
−0.003 0.583 −0.517
**
0.062 0.019
Systematic b
3
0.102
**
0.222 −0.137 −0.020 0.060
b
4
0.089 1.020
**
−0.188 −0.060 −0.115
*
R
2
adj
0.043 0.286 0.057 — 0.046
b
1
−0.034 0.035 0.031 0.024 −0.270
**
b
2
0.009 0.171 −0.469 0.071 0.021
Fin/Metal b
3

0.062 0.853
**
−0.236 −0.076 −0.143
R
2
adj
0.050 0.314 0.057 — 0.059
b
1
−0.038 −0.153
**
0.025 −0.034 −0.004
b
2
−0.014 0.012 −0.170
**
0.015 −0.041
Discretionary b
3
−0.031 0.056 −0.160
*
0.036 −0.045
b
4
−0.024 0.100 −0.191
**
0.009 −0.040
R
2
adj

multimoment asset pricing specification. Such a framework also may cap-
ture a significant proportion of the optionlike dynamics of CTAs reported
by Fung and Hsieh (1997b) and Liang (2003), because the nonlinear pay-
off structure of option contracts generates fat-tailed, asymmetric option
return distributions.
We choose to adopt a simple specification for the characterization of a
multimoment return-generating model, in a similar vein to the study of
Fang and Lai (1997), who report significant prices of risk for systematic
coskewness and cokurtosis of stock returns with the market portfolio. Their
first-pass cubic regression resembles:
(6.2)
where r
m,t
= excess return on the market index
Unlike the prêt-à-porter specification proposed in equation 6.1, where
the market factor chosen had to be neutral with respect to size considera-
tions, the index chosen in equation 6.2 is the one whose influence on CTA
returns is likely to be highest. In accordance with previous studies, we use
the Russell 3000 index as a proxy for the market portfolio.
Table 6.5 summarizes the results of regression equation 6.2 over the
entire period as well as the four subperiods.
The regressions still explain, on average, a very low proportion of the
CTA returns variance. Yet four extremely interesting patterns can be noticed.
1. The multimoment regression seems to provide a slightly better fit than
the multifactor model presented in equation 6.1, with the exception
of the “Weak Bull” period, where the multifactor dominates for all but
the Discretionary strategy.
2. The most significant regression coefficient appears to be b
2
, which is

1
−0.115
*
−0.522
**
0.148 0.189 0.048
b
2
0.021
**
0.043
**
0.022 0.081 −0.028
CTA Index b
3
0.001 0.005
**
−0.0002 −0.017 −0.004
R
2
adj
0.064 0.186 0.073 — 0.111
b
1
−0.151 −0.629
**
0.194 0.051 0.161
b
2
0.026

adj
0.082 0.231
**
0.162 — 0.148
b
1
−0.136 −0.584
**
0.177 0.330 0.127
b
2
0.026
**
0.054
**
0.028 0.131 −0.033
Diversified b
3
0.0002 0.005 −0.001 −0.028 −0.006
R
2
adj
0.081 0.150 0.109 0.065 0.121
b
1
−0.021 −0.093 0.067 0.053 0.105
b
2
0.009
*

0.008
*
−0.001 0.002 0.001
R
2
adj
0.029 0.136 — — —
**
The values are significant at the 10 percent level.
**
The values are significant at the 5 percent level.
c06_gregoriou.qxd 7/27/04 11:09 AM Page 117
4. Neither the multifactor nor the multimoment specification has explana-
tory power for the most extreme movements, namely the “Strong Bull”
and “Bear” market conditions.
These facts lead us to conclude that additional factors are essential to
capture the dynamics of CTA returns and that a subperiod analysis is
required since the returns seem to exhibit very little stationarity. Addition-
ally, the Discretionary and Currency CTA indices need to be studied inde-
pendently, as their return distributions are dissimilar to those of the other
CTA indices.
Tailor-Made Specifications
The starting point of the analysis is driven mostly by empirical considera-
tions. The traditional approaches discussed previously explain a fraction of
the variations in CTA returns, but these factors need to be accompanied,
and occasionally replaced, by alternative return-generating processes. It
would be incorrect to assume that the strategies of CTA managers remain
static over time; the managers adapt to changes in the financial and com-
modity markets as well as to specific market conditions that managed deriv-
ative portfolios such as CTAs are capable of exploiting. As a result, we

the Akaike Information criterion. Table 6.6 presents the differentiated
model results for these indices.
The results are consistent across the different indices, both in terms of
sign and magnitude of the coefficients, but they vary considerably over the
different subperiods. The results over the entire period show a marked
increase in the adjusted R-squared when compared to the two previous
model specifications. The explanatory power of the variables is, however,
still relatively limited when we consider the entire period, with R-squared
ranging from 12.2 percent for the CTA index up to only 19.4 percent for
the Financial and Metals index. The square of the excess returns on the
Russell 3000 (RUS2) and the change in the 10-year interest rate over the 6-
month swap rate (∆MAT) are significant for the four indices. Not surpris-
ingly, these two factors are also important in explaining the CTA returns in
the subperiods. ∆MAT is included as a factor in all the subperiods and is
consistently significant. RUS2 helps explain the variations in returns during
the “Weak Bull” and “Moderate Bull” periods. The two subperiods dur-
ing which the tailor-made factor model best captures the return variations
in the four indices are the “Weak Bull” and “Strong Bull” periods, which
show adjusted R-squared of up to 40.4 percent. This leads us to conclude
that given the appropriate risk factors, we are able to explain a consider-
able proportion of CTA returns in a linear setup. However, the results in
Table 6.6 show that the factors having the best explanatory power change
with market conditions.
As we noted earlier, the return characteristics of the Currency index and
Discretionary index are considerably different from those of the other four
indices, hence the factors that best capture their behavior are different.
Tables 6.7 and 6.8 present the results for the tailor-made models for these
two indices for the entire period as well as the four subperiods.
The Currency index proves to be the index for which the factors were
least successful at explaining the excess returns (Table 6.7). For the entire

—
Weak Bull
CTA Index 0.326 −0.181 — 0.023 — 0.246
*
0.382
**
0.044 —
Systematic 0.293 0.095 — 0.037* — 0.238 0.536
**
−0.045 —
Fin/Metal 0.404 0.201 — 0.022
**
— 0.068 0.258
**
−0.115
*
—
Diversified 0.325 0.164 — 0.028 — 0.297
*
0.516
*
0.089 —
Moderate Bull
CTA Index 0.150 −0.019 — 0.012
*
—— —−0.181
**
—
Systematic 0.183 −0.014 — 0.021
*

*
— — — — — 0.274
**
−0.263
Diversified 0.358 −0.624 — — — — — 0.417
*
0.781
*
Bear
CTA Index 0.154 −0.141 — — −0.001 — — −0.153 —
Systematic 0.163 −0.140 — — −0.001 — — −0.202
*
—
Fin/Metal 0.194 −0.054 — — −0.001 — — −0.180 —
Diversified 0.173 −0.139 — — −0.002 — — −0.199 —
**
The values are significant at the 10 percent level.
**
The values are significant at the 5 percent level.
121
c06_gregoriou.qxd 7/27/04 11:09 AM Page 121
ten on the Russell 3000 index (ATMC) is a significant explanatory variable.
Similar to the four previous indices, the “best-fit” regression is most suc-
cessful at capturing the dynamics of the returns in the “Weak Bull” subpe-
riod, with the adjusted R-squared equal to 0.332. For the “Moderate Bull”
and “Bear” markets, no combination of risk factors manages to provide any
insight into the return structure of the Currency index returns.
Table 6.8 presents the tailor-made regression results for the Discre-
tionary index. Although the results are not impressive when we consider the
entire period (adjusted R-squared of 0.097), the market factors are suc-

*
0.569
**
0.030
Moderate
Bull — — — — — — — — —
Strong
Bull 0.090 3.923 0.273 — −3.172 — — — —
Bear — — — — — — — — —
ATMC = series of returns on the one-month ATM call written on the Russell 3000
index. DEF = U.S. Moody’s Baa corporate bond yield. MAT = U.S. 10-year/6-month
Interest Rate Swap Rate. FX = monthly change in the U.S. dollar/Swiss franc
exchange rate. UMD (Up Minus Down) = average return on the two high prior
return portfolios minus the average return on the two low prior return portfolios.
HDMZD (High Dividend Minus Zero Dividend) = average return of the highest-
dividend-paying stocks versus the stocks that do not dispense dividends. RUS2 =
square of the excess returns on the Russell 3000.
** The values are significant at the 10 percent level.
**The values are significant at the 5 percent level.
c06_gregoriou.qxd 7/27/04 11:09 AM Page 122
TABLE 6.8 Differentiated Model Results for Discretionary Index
R
2
adj
Alpha ATMC FX UMD HDMZD ∆MAT GSCI RUS2 RUS3 MCOM
Entire Period 0.097 −0.212
*
— — — — — 0.091
**
0.007

The values are significant at the 5 percent level.
123
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PERFORMANCE MEASUREMENT
Performance under Changing Market Conditions
Thanks to the effort put in the previous section to explain CTA expected
returns over the subperiods, we can go beyond the use of the Sharpe ratio
to characterize abnormal performance as extensively used in the CTA per-
formance literature. This ratio is extremely useful for ranking purposes, but
not to quantify the extent to which a given index has exceeded a benchmark
return. Furthermore, the pervasive departure from normality of CTA
returns casts doubt on the reliability of this performance measure, which
uses variance as the measure of risk.
Here we apply four types of performance measures to each period:
1. The alpha of the regressions;
2. The Information Ratio (IR) (Grinold and Kahn 1992, 1995) defined as
the ratio of alpha over the standard deviation of residuals;
3
3. The Generalized Treynor Ratio (GTR), which extends the original
Treynor ratio to a multi-index setup (Hübner 2003), defined as the
ratio of the alpha over the total required return; and
4. The Treynor and Mazuy (1966) measure of market timing, which is
simply the coefficient of the squared market return, proxied by RUS2
in our specification.
Although the alpha, the IR, and the GTR provide different portfolio rank-
ings, the test for significance is essentially the same as it reduces to testing
whether alpha = 0, which is typically performed using a Student t-test.
The analysis of Table 6.6 reveals unambiguous results on alphas. For all
strategies, the regression results never allow us to reject the hypothesis of
zero abnormal performance. The only noticeable exception is observed for

tionary index, on the other hand, exhibited negative abnormal performance
over all subperiods, and the aggregate abnormal return over the entire
period is even significantly negative (Table 6.8).
The Treynor and Mazuy (1966) measure of market timing ability, cap-
tured by the coefficient for RUS2, is much more informative. As a reminder,
this coefficient is meant to account for the loading of the skewness-related
risk premium: The greater this value, the more likely it is that the portfolio
returns will have a positive (right) asymmetry, thus putting more weight to
the more positive returns. When considered in the context of performance
measurement, RUS2 captures the manager’s market timing abilities, as it
gives an asymmetric weight to positive and negative deviation from the mean
market excess return. This interpretation is valid provided the expected
market excess return is positive. For example, with a mean return of 1 per-
cent and a coefficient of 1, a deviation of +1 percent with respect to this
value will provide a positive return of 1 × (1% + 1%)
2
= 4%, while a devi-
ation of −1 percent will provide a return of 1 × (1% − 1%)
2
= 0%. Thus, a
positive coefficient signals positive market timing when markets are bullish
and negative market timing ability otherwise.
For the CTA strategies reported in Table 6.6, market timing abilities are
pervasive during the total period, mainly due to the “Weak Bull” and “Mod-
erate Bull” periods. During the (much shorter) “Strong Bull” and “Bear”
periods, this effect completely fades away; it does not even intervene in the
tailor-made regressions. Very noticeable is the same positive sign of the
alpha and the market timing coefficients during the “Weak Bull” period, a
finding that contrasts with many previous studies of abnormal performance
of managed portfolios.

where, for index i,
AR
i,t
= the abnormal return in month t
R
i,t
= the return in month t
a
i
= unexplained return by asset-class factors
b
i,j
= factor loading on the jth asset-class factor
F
j,t
= value of the jth asset-class factor in month t
s(AR
i
) = standard deviation of abnormal returns over entire
sample period
SAR
AR
sAR T
T
AR R F
iT
it
t
T
i

performance is significantly positive and robust during the entire Asian cri-
sis. It sharply contrasts the very low abnormal returns achieved by all other
indices under the same circumstances.
In general, the Russian crisis appears to have a negative effect on CTA
abnormal performance. Although the individual coefficients are not signif-
icant, they are uniformly negative. On the other hand, the Asian crisis, and
more surprisingly the terrorist attacks, yield very small t-values for all the
CTA indices.
The Performance of CTAs in Changing Market Conditions 127
TABLE 6.9 Abnormal Performance during Extreme Events
Russian Asian Terrorist
T Crisis Crisis Attack
CTA Index 1 month −2.78 −0.01 −0.54
(2.32) (2.32) (2.24)
2 months −2.01 0.38 1.45
(3.28) (3.28) (3.17)
Systematic 1 month −2.75 0.02 −0.12
(2.66) (2.66) (2.76)
2 months −1.94 0.17 3.14
(3.77) (3.77) (3.91)
Fin/Metal 1 month −3.55
*
−0.45 −0.28
(2.11) (2.11) (2.16)
2 months −3.03 1.59 3.19
(2.98) (2.98) (3.06)
Diversified 1 month −3.27 0.34 0.32
(3.10) (3.10) (2.98)
2 months −3.00 0.92 3.69
(4.39) (4.39) (4.22)

There is, however, considerable evidence of positive market timing ability
associated with these types of securities.
128 PERFORMANCE
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