Graduate School of Business

Permanent URI for this collectionhttps://hdl.handle.net/10679/9880

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Browsing by Subject "Commodity market"

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    PhD DissertationPublicationMetadata only
    Performance, managerial skill and factor exposures in commodity trading advisors and managed futures funds
    (2016-09) Avcı, Süreyya Burcu; Çağlayan, Mustafa Onur; Çağlayan, Mustafa Onur; Çeliker, U.; Güner, B.; Yücel, M. E.; Demiroğlu, C.; Department of Business; Avcı, Süreyya Burcu
    Understanding risk is important. Prior to 2008, as the yields on safe assets hit rock bottom, investors turned their focus to an alphabet soup of more complex instruments. These complex securities were rated AAA, they appeared as safe as U.S. Treasuries, yet with much higher yields. The financial crisis of 2008 revealed that higher yields on these instruments in fact came with higher risk, albeit too late for these investors. The focus of this research is to understand the risk-return tradeoff in two financial instruments that have not been currently investigated, commodity trading advisors (CTAs) and managed futures funds (MFFs). This study starts with documenting the differences of CTAs and MFFs with hedge funds and mutual funds: We start with legal and operational differences. Next, performance analysis indicates that CTAs and MFFs, as stand-alone investment vehicles, provide higher returns than the average market returns in bear markets; while carrying a lower level of risk. CTAs' and MFFs' strong standing in bear markets let them deserve their so-called title "downside risk protectors." CTAs and MFFs are profitable individual assets, but addition of these funds to classical asset portfolios enhance portfolio performance significantly. This feature makes them strong hedging assets. As expected, in up markets, their performance is below standard asset performances. I find that the superior performance of CTAs and MFFs can be explained by managerial skill. Positive and significant Jensen alphas are evidence of good performance; moreover, persistence of Jensen alphas is supported by both parametric and non-parametric tests. Incentive fee and age of the fund are found to positively related to managerial skill; while somewhat surprisingly, management fee is found to be negatively related to managerial skill. I also find that many financial and macroeconomic factors are statistically unrelated to CTA and MFF performances. However, the value premium (HML) factor and industrial production growth (IPG) are correlated with the performance of these funds. HML has a positive effect on one-month-ahead fund returns whereas IPG has a negative effect on one-month-ahead fund returns. Nonparametric tests support these results marginally. These findings suggest that both CTAs and MFFs use well-known and well-established predictors of expected returns to generate their alphas. Keywords: Commodity trading advisors, managed futures funds, performance analysis,managerial skill, factor exposures.