TAILIEUCHUNG - Commodity Trading Advisors: Risk, Performance Analysis, and Selection Chapter 21

CHAPTER 21 ARMA Modeling of CTA Returns. In this chapter, we extend previous attempts to model hedge fund returns using ARMA models to the case of CTAs. We show that for the period 1996 to 2003, the return series of the largest CTAs are stationary and that ARMA models in certain cases provide adequate representation of the return series. | _J 21 ARMA Modeling of CTA Returns Vassilios N. Karavas and L. Joe Moffitt In this chapter we extend previous attempts to model hedge fund returns using ARMA models to the case of CTAs. We show that for the period 1996 to 2003 the return series of the largest CTAs are stationary and that ARMA models in certain cases provide adequate representation of the return series. Comparing to the hedge fund case we see that a higher order of ARMA model usually is required. We also test for structural changes in the return processes and we fit similar models for the period 2000 to 2003. Results appear to be no drastically different from those reported in previous studies for hedge funds. INTRODUCTION The period 1996 to 2003 offered a number of surprises to investors with the excellent performance of the equity market during the first four years of the period and the subsequent drawdown for three consecutive years until 2003 when the long-expected economic recovery finally appeared. Commodity trading advisors CTAs did not suffer many years of losses and definitely not at the magnitude of the equity markets losses. The CTA indices showed that all years included in this study were profitable for the CTAs with the exception of 1999 when small losses were reported. CTAs offered investors a safe harbor for the years during which control was lost in the equity markets. In the next section we show pieces of historical evidence that CTAs were more stable over time from a performance point of view not only when compared to equity markets but also when compared to hedge funds. Over the past few years a large number of hedge fund managers were dragged toward an increased equity exposure which in several cases 367 368 PROGRAM EVALUATION SELECTION AND RETURNS I I S P 500 Annual Return CSFB Short Bias CSFB DS GM CSFB MF Annual Return -CSFB Composite CA x CSFB CSFB EMN - CSFB ED CSFB ED Multi CSFB MA CSFB FIA CSFB L S CSFB MF CSFB Multi FIGURE CTA and Hedge Fund .

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