The Impact of Performance Fees on Multi-Manager CTA Portfolios

Abstract

The authors study the impact of fees on the performance of multi-manager portfolios within managed futures. Using net-of-fee monthly returns of commodity trading advisors (CTAs) and their fee structures as reported in the BarclayHedge database, they estimate the time series of gross returns. They find that fees represent approximately 50% of gross performance, on average. They consider three fee structures: management fee only; a standard structure that includes both management and incentive fees; and a pooled, or netted, fee structure in which the incentive fee is based on aggregate portfolio performance rather than the performance of individual managers. They also vary the number of managers in a portfolio from 1 to 20 and consider crystallization frequencies between 3 and 12 months. Regardless of the fee structure, they find that average performance increases monotonically with the number of managers in a portfolio, and the distribution of performance becomes tighter. Performance improvement relative to a single-manager investment is highest for multi-manager portfolios that rely on a pooled fee structure. Pooling fees results in fee savings of up to 40% relative to the standard fee management and performance fee structures. They also find that less frequent crystallization consistently improves performance. TOPICS: Portfolio construction, manager selection, futures and forward contracts