Trends’ Signal Strength and the Performance of CTAs

Abstract

We propose a new asset-based factor that relies on aggregating time series 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 find that our proposed factor performs better at replicating the stylized facts of CTAs’ returns, allowing a more meaningful assessment of fund alpha.

Keywords: Time Series Momentum, Trend-Following, Managed Futures, CTAs, Benchmarks, Performance Measurement

JEL Classification: G11; G12; G13; G23