Testing futures trading strategy assumptions

There is a growing literature examining futures-based trading strategies and the performance of commodity trading advisors (CTAs). In this article, the authors test the validity of three key assumptions used in these studies. They test the validity of basing conclusions on analysis of synthetic rather than market price data; they review the evidence on the level of transaction costs, to test the cost model used in modeling futures-based trading strategy; and finally, they test the assumption that CTAs generally charge a management fee of 2% and incentive (performance) fee of 20%. In addition, they present the trend over time in the structure of fees. Their findings suggest that inferences based on synthetic futures replicate those based on exchange-traded data. Over the full period, the average fee levels were 1.82% (management) and 20.2% (incentive)—not significantly different from the levels used in the literature.