Trends Everywhere? The Case of Hedge Fund Styles

Abstract

This paper investigates empirically whether time-series momentum returns can explain the per- formance of hedge funds in the cross-section. Relying on the trend following literature, a volatility- adjusted time-series momentum signal is applied on a daily basis across a large set of futures, covering the major asset classes. We build a hierarchical set of trend factors: the full version TREND can be split in summable factors across two dimensions: the horizon of the signals and the traded asset class. We show that Managed Futures, Global Macro and Fund of Hedge Funds strategies can be partly explained by a TREND exposure. Moreover, a TREND exposure is a significant determinant of hedge funds returns at the fund level, for Managed Futures and Global Macro but also, and more surprisingly, for the other styles.

Keywords: Managed Futures; time series momentum; trend-following; commodity trading advisor (CTA); hedge funds; trading strategies

JEL Classification: G11, G12, G15, F37