Skill or luck?
What Role does the Macroeconomic Cycle Play in CTA Performance?
Introduction
In contrast to the commonly held belief that hedge fund performance is entirely reliant on the skill of the manager, a significant factor influencing the performance of hedge fund managers is the macroeconomic cycle.
In this article, we aim to explore this relationship, shedding light on the extent to which economic fluctuations influence hedge fund managers’ outcomes. We focus on a specific hedge fund strategy, the Commodity Trading Advisor (CTA), and analyze its performance during distinct macroeconomic cycles over the past two decades.
CTA hedge funds engage in trading commodities and derivative contracts across various markets. These funds often utilize systematic, quantitative approaches to capitalize on trends, manage risk, and generate returns. Traditionally, CTAs have provided their investors with an effective hedging tool against crisis periods. To test this theory, we use the monthly time series of the Barclay CTA Index as a benchmark for this hedge fund strategy.
Selecting Macroeconomic Cycles: Insights from NBER's Turning Points
To delve into the impact of macroeconomic cycles on CTA hedge fund performance, we have used the insight provided by the National Bureau of Economic Research (NBER). NBER's chronology of economic cycles serves as our guiding star, allowing us to pinpoint pivotal turning points that mark significant shifts in economic conditions.
• December 2007: the Onset of the Great Recession,
• June 2009: Emergence from the Great Recession,
• February 2020: the COVID-19 Recession,
• and April 2020: the Dawn of a New Economic Expansion.
To unravel the intricate relationship between macroeconomic cycles and CTA performance, we focus on three distinct periods:
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