The Handbook of Commodity Investing

CHAPTER 28

Catching Future Stars Among Micro-CTAs

Greg N. Gregoriou, Ph.D.

Professor of Finance

State University of New York (Plattsburgh)

Fabrice Douglas Rouah, Ph.D.

Vice President

State Street Corporation

When it comes to investing in commodity trading advisors (CTAs), institutional investors often prefer funds with higher assets under management as microsized CTAs suffer from high mortality rates and often display returns that are very volatile. Some microsized CTAs, however, have the potential to evolve into future stars that post superior performance and survive a long time. The desire to identify these potential stars must be balanced with the need to avoid funds that die off prematurely. While some microsized CTAs become stars, they arise from a pool of funds that are at very high risk of death. This high risk of death, however, does not necessarily extend to all micro-CTAs. This chapter investigates the potential of microsized CTAs to evolve into future stars.

CTAs AND THEIR ASSETS

When investors decide to select a CTA for inclusion in their portfolio, their first inclination is typically to select according to performance and size. Small funds are often discarded, out of fear that these CTAs may not thrive in the long run. Investors view small funds as potential failures, especially if these funds have not performed up to par. Moreover, small funds tend to have higher volatility than large funds, which again may ward off potential investors. On the other hand, small CTAs ...