Monday, September 23, 2013

AQR--"Demystifying Managed Futures" (Returns and Anomalies)

CTA's as trend-followers? Not exactly groundbreaking.

On the other hand strategies that attempt to call turning points are much more dangerous to capital and require such severe dedication to risk management that they almost resemble work.

In this paper the focus on initial under-reaction to news, and delayed over- reaction, is without doubt worth the read. Pages 5-7 should be enough to inform the reader whether to expend more time on the balance of the paper.

All three of the authors have connections to AQR Capital Management.
From Stern, NYU:
Forthcoming Journal of Investment Management

Practitioner's Digest
We show that the returns of Managed Futures funds and CTAs can be explained by simple 
trend-following strategies, specifically time series momentum strategies. We discuss the 
economic intuition behind these strategies, including the potential sources of profit due to initial 
under-reaction and delayed over-reaction to news. 
We show empirically that these trend-following strategies explain Managed Futures returns. 
Indeed, time series momentum strategies produce large correlations and high R-squares with 
Managed Futures indices and individual manager returns, including the largest and most successful  managers.
While the largest Managed Futures managers have realized significant alphas to traditional long-only benchmarks,
controlling for time series momentum strategies drives their alphas to zero. 
Finally, we consider a number of implementation issues relevant to time series momentum 
strategies, including risk management, risk allocation across asset classes and trend horizons, 
portfolio rebalancing frequency, transaction costs, and fees.