Diversifying trends

Charles Chevalier and Serge Darolles
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Serge Darolles: DRM - Dauphine Recherches en Management - Université Paris Dauphine-PSL - PSL - Université Paris Sciences et Lettres - CNRS - Centre National de la Recherche Scientifique

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Abstract: A new method is proposed for disentangling the systematic components from the idiosyncratic components of risk associated with trend-following strategies. A simple statistical approach combined with standard dimension reduction techniques enables to identify the common trending component of futures market prices. This methodology is applied to a large set of futures, covering all asset classes, to extract a common risk factor, called CoTrend. It is shown that common trends are higher for some cross-asset class pairs than for intra-asset class pairs, such as JPY/USD and Gold. This result is used to create sectors in a portfolio diversification context, especially for trend-following strategies. Additionally, the CoTrend factor helps understand arbitrage-based Hedge Fund strategies, which by essence are decorrelated from standard risk factors.

Keywords: Time Series Momentum; Portfolio Construction; Factor Analysis; Hedge Funds (search for similar items in EconPapers)
Date: 2024
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Published in Econometrics and Statistics , 2024, ⟨10.1016/j.ecosta.2021.09.002⟩

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Persistent link: https://EconPapers.repec.org/RePEc:hal:journl:hal-04659783

DOI: 10.1016/j.ecosta.2021.09.002

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