Multiple Time Scale Attribution for Commodity Trading Advisor (CTA) Funds

Commodity trading advisors (CTAs) make directional investments in liquid futures and forward markets. Since CTAs generally do not engage in security selection or relative value trades, their performance depends to a large extent on funds ability to time market exposures. We analyze CTA return attribution, splitting returns into contributions from asset class (beta) factors and market timing factors. For each asset, we use timing factors at several frequencies. The highest frequency (e.g., daily) timing factors are absolute values of asset returns, while lower frequency (e.g., weekly or monthly) timing factors also use high-frequency returns. Average fund returns net of beta and market timing contributions are called residual alpha. For CTAs, the market timing contribution varies by frequency. By combining timing factors at different frequencies, we estimate aggregate market timing alpha and residual alpha; this latter quantity is around -8% per year for CTA indexes, with transaction costs being a potential contributor