The data set that we use is the Barclay’s Trading group CTA data for the period from January 1990 to November 2003. The data set is composed of end-of-month returns for the CTA index as well as for five subindices1: the Barclay Currency Traders Index, the Barclay Financial and Metal Traders Index, the Barclay Systematic Traders Index, the Barclay Diversi- fied Traders Index, and the Barclay Discretionary Traders Index.
We divide the sample period into subperiods to investigate the behav- ior of the CTA indices under specific market conditions (see Table 6.1).
The Performance of CTAs in Changing Market Conditions 107
TABLE 6.1 Summary of Subperiods
Panel A: Bull and Bear Markets
Market Trend Start Finish Ann. Return # Obs
Weak Bull 01:1990 12:1993 +10.0% 48
Moderate Bull 01:1994 09:1998 +19.0% 57
Strong Bull 09:1998 03:2000 +29.5% 18
Bear 03:2000 09:2002 −22.6% 30
Panel B: Financial Crises
Extreme Event Start Finish Magnitude # Obs
Russian Crisis 10:1997 11:1997 −13.0% 2
Asian Crisis 08:1998 09:1998 −14.7% 2
Terrorist Crisis 09:2001 10:2001 −18.2% 2
For both panels, start and finish dates are identified as the end-of-month trading days surrounding the subperiod under study. In Panel A, annualized returns are computed using closing values of the S&P 500 index. In Panel B, the magnitude of the crisis is computed by taking the minimum and maximum values of the S&P 500 index during the event month.
1We do not include the Barclay Agricultural Traders Index in this study as the finan- cial variables used for the return-generating model would not explain a significant proportion of the return variance.
The bull market that lasted from the early 1990s until the end of the dot- com bubble in March 2000 is broken down into three subperiods. We refer to the final 18 months prior to the market crash as “Strong Bull”; during this time the annualized return on the Standard & Poor’s (S&P) 500 was 29.5 percent. We call the period from January 1990 to December 1993
“Weak Bull” and the period from January 1994 to September 1998 “Mod- erate Bull.” Not only do the annualized returns nearly double from 10 per- cent to 19 percent over these two subperiods, the return distributions are considerably different over the two periods. The fourth and final subpe- riod that we investigate is the “Bear Market” that lasted from March 2000 to September 2002, during which time the annualized return on the S&P 500 was −22.6 percent.
Three significant market crises occur during our sample period, each of which caused a significant short-term drop in the market. Predictably, these three crises are the Russian default, the Asian currency crisis, and Septem- ber 11 terrorist attacks. Interestingly, the magnitude and duration of these three shocks on the S&P 500 is very similar. Each event triggered a drop in the S&P 500 of about 15 percent, and the time required for the index to return to its preevent level was generally two to three months. The three crises occur in two different subperiods: “Moderate Bull” and “Bear.”
Table 6.2 presents the descriptive statistics for the excess returns on the CTA indices for the entire period as well as for the four subperiods.
Although each individual CTA index has certain intrinsic characteristics, certain general properties appear to be common to all the CTAs in our sam- ple. More specifically, the Jarque-Bera tests over the entire sample period illustrate that all the CTA indices, with the sole exception of the diversified index, exhibit nonnormality in their excess returns. Another common trait is the very poor results during the “Strong Bull” period: all the CTA indices display negative excess returns for this period of very high returns in the stock markets. As a matter of fact, this is unanimously the worst subperiod in terms of performance for all the CTA indices. These results are in accor- dance with previous findings by Edwards and Caglayan (2001) and Liang (2003), who identified the poor performance of CTAs in bull markets. A further examination of the mean excess returns over the four subperiods reveals that for all the CTA indices, the highest excess returns are achieved in “Weak Bull,” which includes the recession of the early 1990s, and
“Bear,” which followed the collapse of the dot-com bubble. This would seem to concur with the notion that CTAs possess valuable return charac- teristics during down markets.
The descriptive statistics for the excess returns of the CTA indices seem to indicate that there exist similar return dynamics across the different types of CTAs. The two subindices that exhibit marginally different return pat-
TABLE 6.2Descriptive Statistics of Excess Returns MeanMedianMaxMinStd. Dev.SkewnessKurtosisJ-B 0.24−0.059.71−6.132.670.383.364.98* 0.31−0.089.71−6.133.150.463.401.99 CTA0.280.045.95−5.182.560.302.731.04 Index−0.42−0.812.24−4.621.70−0.413.220.55 0.410.366.31−4.662.530.283.000.40 0.42−0.0414.17−7.913.460.603.9917.04** 0.82−0.2114.17−7.914.470.673.444.01 Systematic0.370.317.11−7.093.000.233.000.48 Traders Index−0.56−1.092.66−5.032.01−0.222.560.29 0.560.487.06−5.733.130.172.780.20 0.300.056.72−4.642.230.483.236.88* Financial and0.630.126.72−3.842.040.803.675.96* Metal Traders0.180.155.88−4.642.440.393.051.47 Index−0.71−1.041.51−3.161.350.031.850.99 0.530.225.89−4.362.500.182.640.33
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TABLE 6.2(continued) MeanMedianMaxMinStd. Dev.SkewnessKurtosisJ-B 0.460.0611.71−7.353.610.352.993.46 0.730.1711.71−7.024.070.412.901.37 Diversified0.460.079.76−6.883.510.382.931.36 Traders Index−0.52−0.543.18−5.772.43−0.232.350.47 0.640.537.97−6.013.400.182.670.29 −0.02−0.057.85−3.261.441.077.63181** 0.29−0.037.85−3.261.711.719.33103** Discretionary−0.30−0.483.92−2.611.330.683.715.56* Traders Index−0.35−0.031.80−2.881.30−0.482.550.84 0.070.063.67−3.071.420.233.170.31 0.37−0.3514.37−7.993.301.416.44138** 1.040.4014.37−7.995.220.792.974.96* Currency0.08−0.446.99−4.072.290.923.679.09** Traders Index−0.22−0.552.76−1.821.390.712.311.87 0.12−0.396.29−2.412.091.444.4212.95** Excess returns are calculated as the difference between the returns on the CTA indices and the return on the 3-month treasury bill over the same period. **The values are significant at the 10 percent level. **The values are significant at the 5 percent level.
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terns are the Discretionary Traders Index and the Currency Traders Index.
These two indices display the highest skewness and kurtosis; the former is the only index to exhibit negative returns over the entire sample.
Table 6.3 examines the correlation coefficients between the different CTA indices as well as between the CTA indices and the first two return moments of the Russell 3000 (Russell squared). The results for the entire sample as well as the subsamples confirm our earlier findings. The correla- tion coefficient between the CTA index, the Financial and Metal Traders Index, the Systematic Traders Index, and the Diversified Traders Index are positive and close to 1 for all the different periods. The Currency Trader Index and the Discretionary Index have the lowest correlation coefficient with the other CTA indices. The coefficients are still positive between all the indices and for all the subperiods, but the correlation coefficient is much smaller. Over the entire period, all of the CTA indices have a small and neg- ative correlation coefficient with the Russell 3000 index and a positive rela- tion with the square of the Russell 3000 returns. These results are consistent during the four subperiods with the exception of the Currency and Discre- tionary indices, which have a positive relation with the Russell 3000 in cer- tain subperiods. These correlations remain nonetheless small in magnitude.