CTAs - Which Trend is Your Friend?

Abstract

The occurrence of trends within financial markets is inconsistent with the assumptions of classical financial theory. Nevertheless, it can be empirically validated that market prices can be subject to trends and profitably exploited. But − which trends should you measure? Which trend is your friend? This paper shows that this question cannot be answered solely on the basis of the data. Rather, various aspects have to be considered in order to decide which method is regarded as appropriate in which environment. The length of the measured trend, the way the signal is compared and, ultimately, the conversion of the signal into a position are key factors that determine the character of the trend sequence.These factors can also be used to classify different CTA strategies and assess their risk/return profile more accurately.

Keywords: CTA, Momentum, Trend-following, Managed Futures, Hedge Funds

JEL Classification: G1