Are investors’ portfolios enhanced by incorporating CTA index funds?

Abstract

By exploring the CTA index with other representative indices across stock, bond, currency, futures, oil, gold and commodity markets, we reveal several impressive findings for the CTA index. First, an upward trend exists for the CTA index without obvious drops. Second, a lower correlation is shown between the CTA index and each of these indices without exceptions. Third, neither causality nor cointegration is revealed as well. The findings revealed above seldom coexist for other financial commodities, implying that investors are able to enhance their portfolios by incorporating CTA index funds according to the portfolio selection proposed by Markowitz (1952).

Keywords:

• managed futures funds
• CTA index
• correlation coefficients
• asset allocation

JEL Classification:

• G10
• G11
• G15

Notes

¹  The full name of CTA is the Commodity Trading Advisor index, one of the managed futures indices.

²  The lag lengths for the VAR models employed in this study are all selected as lag one in accordance with the statistics of AIC lag length tests.