CAIA Level II: Advanced Core Topics in Alternative Investments, 2nd Edition

31.4 BENCHMARKING OF CTAs

Over time, there have been three approaches to benchmarking managed futures performance. The first has been to use an index of long-only futures contracts. Because CTAs are as likely to be short as to be long, this approach has not been found to be particularly useful. Schneeweis and Spurgin (1997) note that there appears to be little connection between the absolute returns of major indices and the returns of CTA indices, and the results presented suggest that CTA-based indices provide a better benchmark for an actively managed futures portfolio than either passive or active long-only commodity-based performance indices.

The second approach is to use peer groups. In this case, managed futures are most commonly benchmarked to indices representing active or passive futures trading. Active benchmarks of futures trading reflect the actual performance of a universe of CTAs. As previously noted, there are a number of issues that one needs to be aware of when using hedge fund databases, including those reporting CTA performance. Recall that many funds report to only one of these providers and not others. Indeed, some of the best CTAs have no incentive to report to any database. A major problem with using an index reflecting the actual performance of CTAs is that the benchmark is not investable. For traditional asset classes, construction of investable indices is common; relatively inexpensive investable products such as indexed mutual funds and exchange-traded ...