CTA Performance Persistence : 1994-2010

This study attempts to test the performance persistence hypothesis for Commodity Trading Advisors (CTAs) considering the impact of incubation and backfill bias. From the empirical test using Fama-MacBeth regression and quintile analysis, we suggest a robust result that ranking CTAs using the t-statistic of alpha with respect to a CTA benchmark is predictive of future unleveraged returns. We provide evidence that the identified strong persistence of the best performing funds is potentially solely driven by the incubation and backfill biases. We find that the worst performing funds have a significantly higher probability of liquidation than those of the other quintiles, and the top performing funds have a higher conditional probability of staying top performers versus becoming worst performers than that of the worst performing funds