WORKING PAPER
Journal of Portfolio Management,, Fall(1997): 30-41
William Fung
Principal, Paradigm, LDC
David A. Hsieh
Fuqua School of Business, Duke
University, Durham, NC 27708
Abstract
Performance track records contain valuable information, as long as investors correct for the biases inherent in using surviving funds. This paper analyzes the effect of survivorship in private CTA funds. It finds that the dissolution cost in CTA funds is only marginally higher than in mutual funds, even though the dissolution rate in CTA funds is higher than in mutual funds. Style analysis is not affected by survivorship. CTA funds have a dominant style, identified to be 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. Multi-fund management companies behave differently than single-fund management companies in the decisions on fund dissolutions in order to protect their reputation.