Survivorship bias and investment style in the returns of CTAs - The information content of performance track records.

Average returns of large and successful CTA funds have unusual option-like payouts conditional on the performance of global equity markets. The authors examine whether this and related historical CTA return characteristics are due to survivorship bias. Using an extensive sample of surviving and dissolved funds, they find that the dissolution rates and dissolution costs in CTA funds are higher than in mutual funds. Style analysis is not affected by survivorship. CTA funds are found to have a dominant style, identified to a trend-following strategy. A CTA style factor with minimal survivorship bias can be constructed, proxying for the systematic risk in CTA funds. The dissolution cost to investors is further reduced by reputation effects. The authors find that multifund management companies behave differently from single-fund management companies when it comes to terminating unsuccessful funds in order to protect their reputation. Finally, dissolved funds, as well as surviving funds, are found by the authors to exhibit similar option-like conditional return patterns with respect to global equity markets.