Trends’ Signal Strength and the Performance of CTAs

Gert Elaut and Péter Erdős

Financial Analysts Journal, 2019, vol. 75, issue 1, 64-83

Abstract: We propose a new asset-based factor that relies on aggregating momentum signals over different horizons. Aggregating signals this way captures assets’ trend signal strength, thereby addressing a limitation in existing time series momentum strategies. Our factor mimics a trend-following manager that increases exposure to markets where trends develop and decreases exposure to markets where trends fade. Taking into account a number of practical implementation issues, we found that our proposed factor performs better at replicating the stylized facts of Commodity Trading Advisors’ returns than previous methods and allows a more meaningful assessment of fund alpha.Editor's Note: The original version had a typographical error in Equation 5, which has been corrected in this version.Disclosure: The authors report no conflicts of interest. Editor’s Note Submitted 9 November 2017Accepted 31 August 2018 by Stephen J. Brown

Date: 2019
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DOI: 10.1080/0015198X.2018.1547052

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