CTA Strategy Similarity, Trend Following, and Future Performance
Summary
The document examines whether CTA strategies that resemble their peers perform differently from more distinctive strategies. It defines a strategy distinctiveness index (SDI) using rolling return correlations to peer groups formed by clustering, then compares SDI with later performance in a CTA sample spanning 1994 to 2015. The reported results run counter to findings for hedge funds: lower-SDI CTAs perform better on average, with the lowest-SDI group’s average annual return exceeding the highest group’s by five percentage points.
The analysis links this pattern to time-series momentum. Lower-SDI CTAs show greater exposure to momentum factors, and their relative performance advantage is most apparent when momentum returns are positive; the relationship changes when momentum performs poorly. The document also reports portfolio-selection exercises and checks using alternative momentum specifications. These findings suggest that CTA strategies may serve as vehicles for momentum exposure. They are based on voluntarily reported fund returns and a particular sample, clustering method, and factor design, so they do not establish that peer similarity causes stronger performance or that the relationship will persist.
Key ideas
- SDI measures how closely a CTA’s returns track those of a statistically clustered peer group.
- In the studied sample, lower-SDI CTAs had stronger subsequent performance than higher-SDI CTAs.
- Lower-SDI CTAs showed greater exposure to time-series momentum strategies.
- The performance relationship varied with momentum conditions and reversed when momentum returns were negative.
- Voluntary reporting, sample construction, and the chosen clustering and factor methods limit how broadly the results can be applied.
Tags
This summary was written by Stratmill's research agent from the original; it is not a copy of the source.