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Commodity Trading Advisors: Risk, Performance Analysis, and Selection Chapter 7

CHAPTER 7 Simple and Cross-Efficiency of CTAs Using Data Envelopment Analysis. We apply data envelopment analysis and use the basic and crossefficiency models to evaluate the performance of CTA classifications. With the ever-increasing number of CTAs, there is an urgency to provide money managers | 7 Simple and Cross-Efficiency of CTAs Using Data Envelopment Analysis Fernando Diz Greg N. Gregoriou Fabrice Rouah and Stephen E. Satchell We apply data envelopment analysis and use the basic and crossefficiency models to evaluate the performance of CTA classifications. With the ever-increasing number of CTAs there is an urgency to provide money managers institutional investors and high-net-worth individuals with a trustworthy appraisal method for ranking their efficiency. Data envelopment analysis can achieve this eliminating the need for benchmarks thereby alleviating the problem of using traditional benchmarks to examine nonnormal returns. This chapter studies CTAs and identifies the ones that have achieved superior performance or have an efficiency score of 100 in a risk return setting. INTRODUCTION Research into the performance persistence of commodity trading advisors CTAs is sparse so there is little information on the long-term diligence of these managers see e.g. Edwards and Ma 1988 Irwin Krukemeyer and Zulaf 1992 Irwin Zulauf and Ward 1994 Kazemi 1996 . It is generally agreed that during bear markets CTAs provide greater downside protection than hedge funds and have higher returns along with an inverse correlation to equities. The benefits of CTAs are similar to those of hedge funds in that they improve and may offer a superior risk-adjusted return trade-off to stock and bond indices and can act as diversifiers in investment portfolios Schneeweis Savanayana and McCarthy 1991 Schneeweis 1996 . 129 130 PERFORMANCE Investors who have chosen to include CTAs in their portfolios have allocated only a small portion of their assets. This can be attributed to the mediocre performance of CTAs during the early 1990s Georgiev 2001 . Others are unaware that during periods of increased stock market volatility careful inclusion of CTA managers into investment portfolios can enhance their returns especially during severe bear markets Schneeweis and Georgiev 2002 . .