The document summarizes research on the performance of trend-following investing across global markets from 1903 to 2012. Key findings include:
1) Trend-following strategies have delivered consistently strong positive returns each decade for over a century, with low correlation to traditional assets.
2) Trend-following strategies performed best during large equity market declines, helping diversify traditional portfolios.
3) Backtesting shows that allocating 20% of a 60% stock/40% bond portfolio to trend-following from 1903 to 2012 would have increased returns, lowered volatility, and reduced maximum drawdown.
Callan's director of Hedge Fund Research, Jim McKee, explores the advantages of momentum-based investing strategies, which profit from market trends in whichever direction. He discusses the rationale behind them, how they are defined and harnessed for different diversification needs, and whether they are appropriate for fund sponsors.
Parametric provides strategies for exploiting increased market volatility, including rebalancing portfolios and using options strategies. Rebalancing reduces concentration risks and volatility over time by selling assets that have increased in value and buying those that have decreased, capturing returns from volatility. Options strategies can also provide downside protection for portfolios while retaining upside potential. Parametric implemented an options overlay for a client in 2008 that protected against a 5-20% market decline while retaining upside to 30%, balancing protection and participation in gains.
The document discusses structured investing based on decades of financial market data and economic research. It describes a structured investing approach that seeks to capture market returns by investing in large numbers of stocks across asset classes while minimizing costs. It emphasizes investing in stocks, small companies, and value stocks based on academic research identifying these risks as worth taking over the long term. The approach also advocates diversifying globally and across multiple asset classes.
Black Swan Event and How to Prepare for ItSamir Halim
This document discusses preparing for a potential "Black Swan" market event and strategies for market timing. It suggests that while impossible to perfectly predict, active managers can see warnings through indicators on multiple timeframes. The author advocates diversifying across asset classes and holdings, scaling positions, following multiple indicators, and building cash reserves. An example portfolio combines equity and volatility holdings across systems to produce stable returns with minimal drawdowns compared to buy-and-hold. The document also covers relative vs absolute returns and discusses market timing approaches and limitations.
The document provides information about the S&P CNX Nifty and NASDAQ-100 stock indices.
The S&P CNX Nifty tracks the performance of the 50 largest Indian companies listed on the National Stock Exchange of India based on market capitalization. It covers 23 sectors of the Indian economy. The NASDAQ-100 tracks the performance of 100 of the largest domestic and international non-financial companies listed on the Nasdaq Stock Market based on market capitalization. Both indices have eligibility criteria for initial and continued inclusion and use formulae to calculate index values based on the market values and weights of constituent securities.
KDGF Asset Management outlines their investment strategy and philosophy for investing in emerging markets. Their strategy focuses on analyzing capital flows, credit cycles, and liquidity conditions to identify markets that are at inflection points in these cycles. They seek to invest in markets on the "right side" of these cycles and hedge those on the "wrong side" or at risk of crisis. Their process involves in-depth analysis of individual company fundamentals and market positioning to construct a concentrated portfolio of 30 long and short positions across 5-8 emerging markets, with hedges against positions and systemic risks.
The Risk and Return of the Buy Write Strategy On The Russell 2000 IndexRYAN RENICKER
Actionable trade ideas for stock market investors and traders seeking alpha by overlaying their portfolios with options, other derivatives, ETFs, and disciplined and applied Game Theory for hedge fund managers and other active fund managers worldwide. Ryan Renicker, CFA
Callan's director of Hedge Fund Research, Jim McKee, explores the advantages of momentum-based investing strategies, which profit from market trends in whichever direction. He discusses the rationale behind them, how they are defined and harnessed for different diversification needs, and whether they are appropriate for fund sponsors.
Parametric provides strategies for exploiting increased market volatility, including rebalancing portfolios and using options strategies. Rebalancing reduces concentration risks and volatility over time by selling assets that have increased in value and buying those that have decreased, capturing returns from volatility. Options strategies can also provide downside protection for portfolios while retaining upside potential. Parametric implemented an options overlay for a client in 2008 that protected against a 5-20% market decline while retaining upside to 30%, balancing protection and participation in gains.
The document discusses structured investing based on decades of financial market data and economic research. It describes a structured investing approach that seeks to capture market returns by investing in large numbers of stocks across asset classes while minimizing costs. It emphasizes investing in stocks, small companies, and value stocks based on academic research identifying these risks as worth taking over the long term. The approach also advocates diversifying globally and across multiple asset classes.
Black Swan Event and How to Prepare for ItSamir Halim
This document discusses preparing for a potential "Black Swan" market event and strategies for market timing. It suggests that while impossible to perfectly predict, active managers can see warnings through indicators on multiple timeframes. The author advocates diversifying across asset classes and holdings, scaling positions, following multiple indicators, and building cash reserves. An example portfolio combines equity and volatility holdings across systems to produce stable returns with minimal drawdowns compared to buy-and-hold. The document also covers relative vs absolute returns and discusses market timing approaches and limitations.
The document provides information about the S&P CNX Nifty and NASDAQ-100 stock indices.
The S&P CNX Nifty tracks the performance of the 50 largest Indian companies listed on the National Stock Exchange of India based on market capitalization. It covers 23 sectors of the Indian economy. The NASDAQ-100 tracks the performance of 100 of the largest domestic and international non-financial companies listed on the Nasdaq Stock Market based on market capitalization. Both indices have eligibility criteria for initial and continued inclusion and use formulae to calculate index values based on the market values and weights of constituent securities.
KDGF Asset Management outlines their investment strategy and philosophy for investing in emerging markets. Their strategy focuses on analyzing capital flows, credit cycles, and liquidity conditions to identify markets that are at inflection points in these cycles. They seek to invest in markets on the "right side" of these cycles and hedge those on the "wrong side" or at risk of crisis. Their process involves in-depth analysis of individual company fundamentals and market positioning to construct a concentrated portfolio of 30 long and short positions across 5-8 emerging markets, with hedges against positions and systemic risks.
The Risk and Return of the Buy Write Strategy On The Russell 2000 IndexRYAN RENICKER
Actionable trade ideas for stock market investors and traders seeking alpha by overlaying their portfolios with options, other derivatives, ETFs, and disciplined and applied Game Theory for hedge fund managers and other active fund managers worldwide. Ryan Renicker, CFA
An index is constructed to measure movements in financial markets like stocks and bonds. The SENSEX is India's oldest stock market index, first compiled in 1986 based on 30 large, established companies. It uses a free-float methodology, where the index level reflects the free-float market value of component stocks relative to a base period. Stocks are selected based on criteria like market capitalization, liquidity, and representation of key industries.
The document discusses an investment strategy that focuses on companies in countries with low price-to-sales ratios and high real interest rates. The strategy screens for large, liquid companies trading above their previous year's high with high free cash flow. Applying this strategy from 2009-2014 to countries like South Korea, Japan, the US and Thailand outperformed the market by 50%. Ongoing rebalancing is key to maintain outperformance. Risks include increased volatility if central bank policies change.
The document discusses currency forward arbitrage opportunities that arise from interest rate differentials between currencies. Specifically, it discusses how monitoring euro/dollar forward rates versus Euribor rates and credit spreads can help identify arbitrage opportunities during periods of market dislocation when normal pricing methods become unreliable. Examples are provided to illustrate how adjusting forward rates based on changing deposit rates can remove arbitrage opportunities between the forward market and money markets.
The document discusses 4 future financial trends: 1) Home ownership will become more difficult as interest rates remain low, encouraging higher home prices. 2) Real incomes will continue declining due to globalization, automation, and inflation measurement issues. 3) There will be no secure careers as jobs are replaced by technology like AI. 4) Pension payouts will decline further as retirees withdraw funds while younger generations have to support them and put less into their own pensions. The document provides advice on financial planning to prepare for these trends, such as saving 10% of income each pay period and purchasing insurance to mitigate risks outside one's control.
2015 why low beta (and not low volatility) outperformsFrederic Jamet
This document discusses why low beta strategies outperform compared to low volatility strategies. It provides 7 theoretical arguments for why low beta stocks are underpriced, including behavioral biases that push investors towards high beta stocks and rational constraints that limit arbitrage of the low beta anomaly. Empirically, it shows that both low beta and low volatility strategies have outperformed the market, but the outperformance is better explained by the low beta feature rather than just low volatility. Low beta strategies tend to have lower skewness, which makes them less risky and more attractively priced by rational investors.
Moving averages and volatility bands like Bollinger Bands, Keltner Channels, and Donchian Channels can be used to identify trends and potential buy/sell signals in financial markets. They provide relative definitions of high and low prices that can help compare price action to indicators. Parameters like length of moving averages and bandwidth percentages must be chosen based on the asset and trading objectives. Crossing or moving outside the bands can signal trend continuation or reversals depending on other confirming indicators and market conditions.
The document discusses key considerations for long-term investing, focusing on longevity and the importance of making investment decisions that will allow one's money to last a lifetime. It outlines two main investment decisions - whether to take an active or passive approach, and if passive, whether to implement an indexing or asset class strategy. For the first decision, it notes that most active managers underperform the market, while passive investing aims to capture market returns at low cost. For the second decision, it explains that asset class investing seeks to maintain consistent risk exposures and has more flexibility, while indexing aims to replicate market segments.
Studies within the field of Behavioural Finance have shown that due to human bias,
market participants do not always act rationally. This creates opportunities in the market for traders to profit from the inefficiencies created by these biases. However, Behavioural Finance also shows that these same biases cause traders to act in ways that could have negative impacts on their personal trading results. The perception of fund managers does change when they have been trained on Behavioural Finance (Nikiforow, 2010). Training sharpens the awareness of loss aversion and limits the affinity for conformity. Nikiforow suggests that what is needed is to incorporate these approaches into the investment process (Nikiforow, 2010). This paper reviews some of the common behavioural biases and how they can impact trading. It then covers the general content and structure of a trading plan and recommends areas where traders can incorporate behavioural bias awareness into their plans using rules and checkpoints.
The document discusses various techniques for analyzing stocks and selecting companies to invest in, including fundamental analysis and technical analysis. It describes Dow Theory, Elliott Wave Theory, and candlestick patterns as technical analysis methods. It also covers the types of stock market participants, online trading mechanisms, and order placing on stock exchanges.
Webinar on Structured Investing - A deliberate and thoughtful investment process designed to help you achieve your lifetime financial goals and focus on what matters most to you, whether it is putting your children through college, philanthropy or a secure retirement.
This document summarizes a statistical arbitrage strategy that evaluates mean reversion in stock prices over time. It describes the strategy's assumptions that stock prices temporarily diverge from their equilibrium relative to the market before reverting. The experiment uses S&P 500 stock data to calculate daily returns, correlations, betas and residuals over rolling 60-day windows. When residuals exceed +/-2 standard deviations, positions are taken assuming reversion will occur. While backtested returns are appealing, live trading realities like transaction costs and limited share availability would likely reduce profits versus this theoretical analysis.
The document provides an update on the MintKit Growth Index (MGX), which tracks a selection of large-cap stocks focused on steady growth at modest risk. In 2018, the stock market fluctuated significantly and MGX underperformed the broader market, falling 11.8% compared to a 6.2% drop in the S&P 500. For 2019, the MGX roster has been revised to emphasize stable growth over high-potential but volatile stocks, in light of continued uncertainty expected in the market.
Monthly Market Perspective - June 2016David Berger
The drivers of short-term market moves can be vastly different from those which underpin the cycles of longer-term market direction. This month we examine a variety of these factors.
2012 what are the performance drivers of the global managed volatilityFrederic Jamet
1) The Global Managed Volatility strategy has outperformed the market index over the past 13 years while significantly reducing risk, as measured by volatility.
2) The strategy's outperformance is driven by its low exposure to the underperforming market factor during this period, as well as positive exposure to the value and small-cap factors.
3) Exposure to value stocks can be attributed to these stocks' neglected nature and de-correlated behavior, while exposure to small-caps comes from their greater number leading to more frequent selection in a non-market cap weighted strategy. The strategy's performance is diversified across multiple factors rather than relying solely on volatility reduction.
Impact of macroeconomic variables on stock returnsMuhammad Mansoor
The document discusses the impact of macroeconomic factors on stock returns. It provides background information on financial markets, primary and secondary markets, and stock market returns. It then summarizes several empirical studies that have examined the relationship between macroeconomic variables like interest rates, inflation, GDP, exchange rates, and stock market returns in countries like Pakistan, Japan, Nigeria, and others. The studies found both positive and negative relationships between different macroeconomic factors and stock returns in various markets. The document aims to contribute to this area of research by examining the impact of macroeconomic variables on stock returns in the Pakistani stock market.
Traditional methods to measure volatility case study of selective developed ...Alexander Decker
This document analyzes stock market volatility across developed and emerging markets from 1997-2009 using traditional measures like standard deviation. Key findings include:
- Returns for all markets showed non-normality, with emerging markets exhibiting more non-normality and higher kurtosis, indicating more peaked return distributions.
- Volatility, as measured by standard deviation, was highest for Turkey, Brazil, and China - all emerging markets. However, some developed markets were found to be more volatile than some emerging markets, suggesting volatility is not unique to emerging markets.
- The analysis concludes volatility should be measured using other methods like extreme value analysis due to the heavy-tailed distributions found in emerging market returns. This could provide better guidance for
El documento presenta los objetivos de aprendizaje de una clase divididos en tres categorías: cognitivo, procedimental y actitudinal. El objetivo cognitivo es aplicar el concepto de presupuesto para administrar dinero. Los objetivos procedimentales son clasificar necesidades humanas según conceptos de la clase. El objetivo actitudinal es asumir actitudes de respeto y empatía con compañeros de trabajo y sus necesidades.
Separating Myths from Truth - The True Story of InvestingRichard Reyes
The following presentation dispells the myth behind stock picking, market timing and track record investing. It also shows the millions that has been lost by investors who have believed the myth.
The document discusses developing a personal investment philosophy by identifying one's true purpose for money, market beliefs, and investment strategy. It explains that having a clear investment philosophy based on understanding these principles can help alleviate common investor dilemmas and provide better financial outcomes through a structured, long-term approach. Developing an investment philosophy is presented as key to achieving financial goals with peace of mind.
When Active Investing is the Best StrategyWelch LLP
The document summarizes a webinar on active investing versus passive investing. It discusses that active investing involves selecting securities based on factors like management, microeconomics, valuation, and risk/reward, rather than trying to time the market or make predictions. Active management can provide flexibility, risk management, and tax benefits. Fees for active managers are generally around 1% and should be covered by outperforming benchmarks over time. When selecting an active manager, investors should consider their trustworthiness, service, long-term track record, reasonable fees, and independence. The webinar presenters were from Welch LLP and Brookfield Soundvest Capital Management and discussed active investment strategies.
After examining data across dozens of markets and asset classes, the authors James P. O'Shaughnessy and Gregory L. Morris reached the clear conclusion that value strategies have outperformed growth strategies over the long run across global markets and asset classes.
An index is constructed to measure movements in financial markets like stocks and bonds. The SENSEX is India's oldest stock market index, first compiled in 1986 based on 30 large, established companies. It uses a free-float methodology, where the index level reflects the free-float market value of component stocks relative to a base period. Stocks are selected based on criteria like market capitalization, liquidity, and representation of key industries.
The document discusses an investment strategy that focuses on companies in countries with low price-to-sales ratios and high real interest rates. The strategy screens for large, liquid companies trading above their previous year's high with high free cash flow. Applying this strategy from 2009-2014 to countries like South Korea, Japan, the US and Thailand outperformed the market by 50%. Ongoing rebalancing is key to maintain outperformance. Risks include increased volatility if central bank policies change.
The document discusses currency forward arbitrage opportunities that arise from interest rate differentials between currencies. Specifically, it discusses how monitoring euro/dollar forward rates versus Euribor rates and credit spreads can help identify arbitrage opportunities during periods of market dislocation when normal pricing methods become unreliable. Examples are provided to illustrate how adjusting forward rates based on changing deposit rates can remove arbitrage opportunities between the forward market and money markets.
The document discusses 4 future financial trends: 1) Home ownership will become more difficult as interest rates remain low, encouraging higher home prices. 2) Real incomes will continue declining due to globalization, automation, and inflation measurement issues. 3) There will be no secure careers as jobs are replaced by technology like AI. 4) Pension payouts will decline further as retirees withdraw funds while younger generations have to support them and put less into their own pensions. The document provides advice on financial planning to prepare for these trends, such as saving 10% of income each pay period and purchasing insurance to mitigate risks outside one's control.
2015 why low beta (and not low volatility) outperformsFrederic Jamet
This document discusses why low beta strategies outperform compared to low volatility strategies. It provides 7 theoretical arguments for why low beta stocks are underpriced, including behavioral biases that push investors towards high beta stocks and rational constraints that limit arbitrage of the low beta anomaly. Empirically, it shows that both low beta and low volatility strategies have outperformed the market, but the outperformance is better explained by the low beta feature rather than just low volatility. Low beta strategies tend to have lower skewness, which makes them less risky and more attractively priced by rational investors.
Moving averages and volatility bands like Bollinger Bands, Keltner Channels, and Donchian Channels can be used to identify trends and potential buy/sell signals in financial markets. They provide relative definitions of high and low prices that can help compare price action to indicators. Parameters like length of moving averages and bandwidth percentages must be chosen based on the asset and trading objectives. Crossing or moving outside the bands can signal trend continuation or reversals depending on other confirming indicators and market conditions.
The document discusses key considerations for long-term investing, focusing on longevity and the importance of making investment decisions that will allow one's money to last a lifetime. It outlines two main investment decisions - whether to take an active or passive approach, and if passive, whether to implement an indexing or asset class strategy. For the first decision, it notes that most active managers underperform the market, while passive investing aims to capture market returns at low cost. For the second decision, it explains that asset class investing seeks to maintain consistent risk exposures and has more flexibility, while indexing aims to replicate market segments.
Studies within the field of Behavioural Finance have shown that due to human bias,
market participants do not always act rationally. This creates opportunities in the market for traders to profit from the inefficiencies created by these biases. However, Behavioural Finance also shows that these same biases cause traders to act in ways that could have negative impacts on their personal trading results. The perception of fund managers does change when they have been trained on Behavioural Finance (Nikiforow, 2010). Training sharpens the awareness of loss aversion and limits the affinity for conformity. Nikiforow suggests that what is needed is to incorporate these approaches into the investment process (Nikiforow, 2010). This paper reviews some of the common behavioural biases and how they can impact trading. It then covers the general content and structure of a trading plan and recommends areas where traders can incorporate behavioural bias awareness into their plans using rules and checkpoints.
The document discusses various techniques for analyzing stocks and selecting companies to invest in, including fundamental analysis and technical analysis. It describes Dow Theory, Elliott Wave Theory, and candlestick patterns as technical analysis methods. It also covers the types of stock market participants, online trading mechanisms, and order placing on stock exchanges.
Webinar on Structured Investing - A deliberate and thoughtful investment process designed to help you achieve your lifetime financial goals and focus on what matters most to you, whether it is putting your children through college, philanthropy or a secure retirement.
This document summarizes a statistical arbitrage strategy that evaluates mean reversion in stock prices over time. It describes the strategy's assumptions that stock prices temporarily diverge from their equilibrium relative to the market before reverting. The experiment uses S&P 500 stock data to calculate daily returns, correlations, betas and residuals over rolling 60-day windows. When residuals exceed +/-2 standard deviations, positions are taken assuming reversion will occur. While backtested returns are appealing, live trading realities like transaction costs and limited share availability would likely reduce profits versus this theoretical analysis.
The document provides an update on the MintKit Growth Index (MGX), which tracks a selection of large-cap stocks focused on steady growth at modest risk. In 2018, the stock market fluctuated significantly and MGX underperformed the broader market, falling 11.8% compared to a 6.2% drop in the S&P 500. For 2019, the MGX roster has been revised to emphasize stable growth over high-potential but volatile stocks, in light of continued uncertainty expected in the market.
Monthly Market Perspective - June 2016David Berger
The drivers of short-term market moves can be vastly different from those which underpin the cycles of longer-term market direction. This month we examine a variety of these factors.
2012 what are the performance drivers of the global managed volatilityFrederic Jamet
1) The Global Managed Volatility strategy has outperformed the market index over the past 13 years while significantly reducing risk, as measured by volatility.
2) The strategy's outperformance is driven by its low exposure to the underperforming market factor during this period, as well as positive exposure to the value and small-cap factors.
3) Exposure to value stocks can be attributed to these stocks' neglected nature and de-correlated behavior, while exposure to small-caps comes from their greater number leading to more frequent selection in a non-market cap weighted strategy. The strategy's performance is diversified across multiple factors rather than relying solely on volatility reduction.
Impact of macroeconomic variables on stock returnsMuhammad Mansoor
The document discusses the impact of macroeconomic factors on stock returns. It provides background information on financial markets, primary and secondary markets, and stock market returns. It then summarizes several empirical studies that have examined the relationship between macroeconomic variables like interest rates, inflation, GDP, exchange rates, and stock market returns in countries like Pakistan, Japan, Nigeria, and others. The studies found both positive and negative relationships between different macroeconomic factors and stock returns in various markets. The document aims to contribute to this area of research by examining the impact of macroeconomic variables on stock returns in the Pakistani stock market.
Traditional methods to measure volatility case study of selective developed ...Alexander Decker
This document analyzes stock market volatility across developed and emerging markets from 1997-2009 using traditional measures like standard deviation. Key findings include:
- Returns for all markets showed non-normality, with emerging markets exhibiting more non-normality and higher kurtosis, indicating more peaked return distributions.
- Volatility, as measured by standard deviation, was highest for Turkey, Brazil, and China - all emerging markets. However, some developed markets were found to be more volatile than some emerging markets, suggesting volatility is not unique to emerging markets.
- The analysis concludes volatility should be measured using other methods like extreme value analysis due to the heavy-tailed distributions found in emerging market returns. This could provide better guidance for
El documento presenta los objetivos de aprendizaje de una clase divididos en tres categorías: cognitivo, procedimental y actitudinal. El objetivo cognitivo es aplicar el concepto de presupuesto para administrar dinero. Los objetivos procedimentales son clasificar necesidades humanas según conceptos de la clase. El objetivo actitudinal es asumir actitudes de respeto y empatía con compañeros de trabajo y sus necesidades.
Separating Myths from Truth - The True Story of InvestingRichard Reyes
The following presentation dispells the myth behind stock picking, market timing and track record investing. It also shows the millions that has been lost by investors who have believed the myth.
The document discusses developing a personal investment philosophy by identifying one's true purpose for money, market beliefs, and investment strategy. It explains that having a clear investment philosophy based on understanding these principles can help alleviate common investor dilemmas and provide better financial outcomes through a structured, long-term approach. Developing an investment philosophy is presented as key to achieving financial goals with peace of mind.
When Active Investing is the Best StrategyWelch LLP
The document summarizes a webinar on active investing versus passive investing. It discusses that active investing involves selecting securities based on factors like management, microeconomics, valuation, and risk/reward, rather than trying to time the market or make predictions. Active management can provide flexibility, risk management, and tax benefits. Fees for active managers are generally around 1% and should be covered by outperforming benchmarks over time. When selecting an active manager, investors should consider their trustworthiness, service, long-term track record, reasonable fees, and independence. The webinar presenters were from Welch LLP and Brookfield Soundvest Capital Management and discussed active investment strategies.
After examining data across dozens of markets and asset classes, the authors James P. O'Shaughnessy and Gregory L. Morris reached the clear conclusion that value strategies have outperformed growth strategies over the long run across global markets and asset classes.
Richard Horowitz: Achieving Financial IndependenceRichard Horowitz
This document discusses achieving financial independence through careful planning and commitment. It recommends setting clear financial goals with your spouse and tracking all spending for a month to identify unnecessary expenses. Once identified, non-essential spending should be cut back or eliminated from the budget to begin saving money. Tracking expenses, creating a budget, and developing frugal habits are key steps to building savings and financial security over time. With discipline and sacrifice, the document asserts that financial independence is attainable.
The Sustainable Active Investing Framework: Simple, but Not Easy by Wesley Gr...Quantopian
To some, the debate of passive versus active investing is akin to Eagles vs. Cowboys or Coke vs. Pepsi. In short, once our preference for one style over the other is established is can become so overwhelming that it becomes a proven fact or incontrovertible reality in our minds.
We cannot overemphasize that alpha in the market is no cakewalk. More importantly, being smart, having superior stockpicking skills, or amassing an army of PhDs to crunch data is only half of the equation. Even with those tools, you are still only one shark in a tank filled with other sharks. All sharks are smart, all sharks have a MBA or PhD from a fancy school, and all the sharks know how to analyze a company. Maintaining an edge in these shark infested waters is no small feat, and one that only a handful (e.g., we can count them in one hand) of investors has successfully accomplished.
In order too achieve sustainable success as an active investing, one needs both skill and an understanding of human psychology and market incentives (behavioral finance). We start our journey where mine began: as an aspiring PhD student studying under Eugene Fama at the University of Chicago. Let the adventure begin...
This presentation surveys one of the longest enduring debates in investment management: active vs. passive management. Expliciting and managing expectations from pension fund trustees and investment is the sensible route to take.
Dual Momentum Investing by Gary Antonacci QuantCon 2016Quantopian
Gary will begin by reviewing the most common investment vehicles throughout history while explaining their advantages and disadvantages. He will then show how momentum can help accentuate the positives and eliminate the negatives. Using easily understood examples and historical research findings, Gary will show how relative strength momentum can enhance investment return, while trend-following absolute momentum can dramatically decrease bear market exposure. Finally, Gary will show how you can implement and easily maintain your very own dual momentum portfolio using the best assets classes.
Technical analysis is the attempt to forecast stock prices based on historical market data such as price, volume, and other indicators. Technicians look for trends and patterns that may indicate future price movements. They analyze charts like bar charts, candlestick charts, and point and figure charts to identify patterns. Common patterns include head and shoulders, triangles, and rounded tops/bottoms. Technicians also use indicators like MACD, RSI, and Bollinger Bands to generate buy and sell signals. The goal is to time entries and exits to generate above-market returns, though perfect timing is difficult to achieve in practice.
This document summarizes research on the momentum factor in equities. It finds that stocks with strong recent performance tend to continue outperforming, known as the momentum effect. The biggest challenge for capturing momentum is its high inherent turnover. Using optimization in portfolio construction can successfully capture momentum while controlling turnover. Adding momentum to portfolios with other factors like value provides diversification benefits due to its negative correlation with value.
The study was undertaken to investigate the possibility of momentum and contrarian strategies to outperform and generate a superior return to the investor i.e. returns over and above the benchmark index. Analysis of the data collected over four years (2016-2019) for quarterly, half-yearly and yearly holding periods resulted in rejecting the possibility of the momentum and contrarian strategies to outperform index consistently, even though they provide huge returns sometimes, in the Indian stock market for the period under study
AIAR Winter 2015 - Henry Ma Adaptive Invest ApproachHenry Ma
This document discusses the shortcomings of modern portfolio theory and the efficient market hypothesis. It introduces an alternative framework called adaptive investment which adjusts portfolios based on changing economic and market conditions. Specifically, it discusses how the risk/return relationship breaks down when including more asset classes, how average returns and other parameters are unstable over time. It also discusses how traditional investment practices like buy-and-hold and benchmark-centric investing led to suboptimal outcomes for investors. The document proposes that an adaptive investment approach which adjusts to different market regimes may better help investors achieve their goals.
An alternative perspective to EM investing: The case for an industry allocati...Jean Meilhoc Ricaume
Investors have long recognised the compelling opportunity offered by emerging markets equities. Yet while returns from the asset class have considerably outperformed developed markets equities over previous market cycles, they have tended to be more volatile, severely testing investors’ resolve. Rather than attempting to time market allocations, or select regions or specific countries to over- or underweight, we believe that our proprietary emerging markets macro growth indicators and skill in identifying industry performance relative to them may offer investors a differentiated source of returns.
The paper opens with an overview of the
commodity trading advisor (CTA) sector, highlighting the
significant growth that has taken place in the managed
futures industry in recent years and explaining how
the managed futures strategies that CTAs employ
work in practice. The breadth of sub-strategies under
the managed futures umbrella are then examined.
The third part of the paper examines the benefits and
perceived risks to investors of allocating to managed
futures strategies and also addresses various common
misunderstandings about CTAs.
The paper concludes by exploring the common ways
as to how investors can access the various investment
strategies that are available
Algorithmic strategy with adoptable trading frequency, effectively works with relatively inefficient markets. To the attention of potential investors/partners.
Originally published in 2005. Abstract: Over the years many commodity trading advisors, proprietary traders, and global macro hedge funds have successfully applied various trend following methods to profitably trade in global futures markets. Very little research, however, has been published regarding trend following strategies applied to stocks. Is it reasonable to assume that trend following works on futures but not stocks? We decided to put a long only trend following strategy to the test by running it against a comprehensive database of U.S. stocks that have been adjusted for corporate actions. Delisted companies were included to account for survivorship bias. Realistic transaction cost estimates (slippage & commission) were applied. Liquidity filters were used to limit hypothetical trading to only stocks that would have been liquid enough to trade, at the time of the trade. Coverage included 24,000+ securities spanning 22 years. The empirical results strongly suggest that trend following on stocks does offer a positive mathematical expectancy, an essential building block of an effective investing or trading system.
This study examines style drift in US mutual funds between 2000-2015 and how it relates to changing market conditions. The authors find significant periods of style drift, especially around 2008, and less drift since then. They are unable to clearly link drift direction to market changes. Over the period, core funds appear to drift styles more than other fund types. The authors conclude style drift has changed over time and decreased significantly since 2008.
Dimensional investors are able to capture the value premium where others fail through an integrated investment process. Their process begins with clear investment principles of efficient markets and targeting dimensions of expected return like value and size. They design strategies for continuous exposure to these premium-generating factors. Their portfolio engineering, management, and trading are dynamically integrated to minimize costs from factors like momentum and provide liquidity. This allows Dimensional to reliably deliver excess returns to investors from targeting premiums.
Superior performance by combining Rsik Parity with Momentum?Wilhelm Fritsche
This document examines different strategies for global asset allocation between equities, bonds, commodities and real estate. It finds that applying trend following rules substantially improves risk-adjusted performance compared to traditional buy-and-hold portfolios. It also finds trend following to be superior to risk parity approaches. Combining momentum strategies with trend following further improves returns while reducing volatility and drawdowns. A flexible approach that allocates capital based on volatility-weighted momentum rankings of 95 markets produces attractive, consistent risk-adjusted returns.
The document discusses pair trading strategies using equities, ETFs, and stock indices. It finds that:
1) A mean-reversion strategy that recalibrates hedge ratios and means over rolling windows outperforms a static strategy for equity pairs.
2) Pair trading performance is more consistent for ETFs and indices than for individual equities.
3) A strategy relying on price shocks is inappropriate for equity pairs but can profitably trade index pairs if risks are managed.
The Financial Review 40 (2005) 1--9Reflections on the Effi.docxtodd771
The document summarizes evidence that actively managed investment funds do not consistently outperform the market. Over periods of 10 years or more, over 80% of actively managed funds underperformed their benchmark indexes. This suggests that markets are generally efficient, as arbitrage opportunities are not being exploited by professional investors. While some active managers do beat the market in individual periods, there is no persistence in performance - past winners often underperform in future periods. Expenses and high portfolio turnover help explain why the average actively managed fund underperforms the market by over 200 basis points after fees. Overall, the evidence supports the efficient market hypothesis and suggests investors are best served by low-cost index funds.
This document presents a model of market momentum. The model shows that:
[1] Momentum is more pronounced in a confident market where investors incorporate new information into prices more slowly.
[2] Only idiosyncratic shocks, not systematic shocks, can produce momentum, as systematic shocks do not affect cross-sectional stock returns.
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South Dakota State University degree offer diploma Transcript
A Century of Evidence on Trend-Following Investing
1. AQR Capital Management, LLC FOR INVESTMENT PROFESSIONAL USE ONLY 1
A Century of Evidence on Trend-Following Investing
Brian Hurst Fall 2012
Principal
Yao Hua Ooi
Principal
Lasse H. Pedersen, Ph.D.*
Principal
A Century of Evidence on
Trend-Following Investing
Executive Summary
We study the performance of trend-following investing across global markets since 1903, extending
the existing evidence by more than 80 years. We find that trend-following has delivered strong
positive returns and realized a low correlation to traditional asset classes each decade for more
than a century. We analyze trend-following returns through various economic environments and
highlight the diversification benefits the strategy has historically provided in equity bear markets.
Finally, we evaluate the recent environment for the strategy in the context of these long-term results.
Please read important disclosures at the end of this paper.
AQR Capital Management, LLC I Two Greenwich Plaza, Third Floor I Greenwich, CT 06830 I T : 203.742.3600 I F : 203.742.3100 I www.aqr.com
FOR INVESTMENT PROFESSIONAL USE ONLY
* Brian Hurst and Yao Hua Ooi are at AQR Capital Management, and Lasse Heje Pedersen is at New York University, Copenhagen
Business School, and AQR Capital Management. We are grateful to Cliff Asness and John Liew for helpful comments, and to Ari Levine,
Haitao Fu, and Vineet Patil for excellent research assistance.
2.
3. AQR Capital Management, LLC FOR INVESTMENT PROFESSIONAL USE ONLY 2
A Century of Evidence on Trend-Following Investing
Section 1: Introduction
As an investment style, trend-following has existed for a very long
time. Some 200 years ago, the classical economist David Ricardo’s
imperative to “cut short your losses” and “let your profits run on”
suggests an attention to trends. A century later, the legendary
trader Jesse Livermore stated explicitly that the “big money was
not in the individual fluctuations but in… sizing up the entire
market and its trend.”1
The most basic trend-following strategy is time series momentum
– going long markets with recent positive returns and shorting
those with recent negative returns. Time series momentum has
been profitable on average since 1985 for nearly all equity index
futures, fixed income futures, commodity futures, and currency
forwards.2
The strategy explains the strong performance of
Managed Futures funds from the late 1980s, when fund returns
and index data first becomes available.3
This paper seeks to establish whether the strong performance
of trend-following is a statistical fluke of the last few decades
or a more robust phenomenon that exists over a wide range of
economic conditions. Using historical data from a number of
sources, we construct a time series momentum strategy all the
way back to 1903 and find that the strategy has been consistently
profitable throughout the past 110 years.4
We examine the
strategy’s decade-by-decade performance, its correlation to major
asset classes, and its performance in historical equity bull and bear
markets. The wealth of data also provides context for evaluating
the recent environment for the strategy. We consider the effect of
increased assets in the strategy as well as the increased correlations
across markets since the credit crisis. We also review a number of
developments that are potentially favorable for the strategy going
forward, such as lower trading costs, lower fees, and an increased
number of tradable markets.
Section 2: Constructing the Time Series
Momentum Strategy
Trend-following investing involves going long markets that have
been rising and going short markets that have been falling, betting
that those trends continue. We create a time series momentum
1 Ricardo's trading rules are discussed by Grant (1838) and the quote attributed to
Livermore is from Lefèvre (1923).
2 Moskowitz, Ooi, and Pedersen (2012).
3 Hurst, Ooi, and Pedersen (2012).
4 Our century of evidence for time series momentum complements the evidence
that cross-sectional momentum (a closely related strategy based on a security’s
performance relative to its peers) has delivered positive returns in individual equities
back to 1866 (Chabot, Ghysels, and Jagannathan, 2009) and has worked across
asset classes (Asness, Moskowitz, and Pedersen, 2012).
strategy that is simple, without many of the often arbitrary choices
of more complex models. Specifically, we construct an equal-
weighted combination of 1-month, 3-month, and 12-month time
series momentum strategies for 59 markets across 4 major asset
classes – 24 commodities, 11 equity indices, 15 bond markets,
and 9 currency pairs – from January 1903 to June 2012. Since
not all markets have return data going back to 1903, we construct
the strategies using the largest number of assets for which return
data exist at each point in time. We use futures returns when they
are available. Prior to the availability of futures data, we rely on
cash index returns financed at local short rates for each country.
Appendix A lists the markets that we consider and the source and
length of historical return data used.
For each of the three time series momentum strategies, the
position taken in each market is determined by assessing the
past return in that market over the relevant look-back horizon.
A positive past return is considered an “up trend” and leads to
a long position; a negative past return is considered a “down
trend” and leads to a short position. Therefore, each strategy
always holds either a long or short position in every market. Each
position is sized to target the same amount of volatility, both to
provide diversification and to limit the portfolio risk from any one
market. The positions across the three strategies are aggregated
each month, and scaled such that the combined portfolio has an
annualized ex-ante volatility target of 10%.5
The volatility scaling
procedure ensures that the combined strategy targets a consistent
amount of risk over time, regardless of the number of markets that
are traded at each point in time.
Finally, we subtract transaction costs and fees. Our transaction cost
estimates are based on current estimates of average transaction
costs in each of the four asset classes, as well as an estimate of
how much higher transaction costs were historically compared to
the present, based on Jones (2002). To simulate fees, we apply a
2% management fee and a 20% performance fee subject to a high-
water-mark, as is typical for Managed Futures managers.6
Details
on transaction costs and fee simulations are given in Appendix B.
Our methodology follows that of Moskowitz, Ooi, and Pedersen
(2012) and Hurst, Ooi, and Pedersen (2012). These authors find
that time series momentum captures well the performance of the
Managed Futures indices and manager returns, including the
largest funds, over the past few decades when data on such funds
exists.
5 A simple covariance matrix estimated using rolling 3-year equally weighted monthly
returns is used in the portfolio volatility scaling process.
6 While a 2/20 fee structure has been commonplace in the industry, some managers
charged higher management and performance fees in earlier time periods. On the
other hand, there are also managers that charge lower fees for the strategy today.
4. AQR Capital Management, LLC FOR INVESTMENT PROFESSIONAL USE ONLY 3
A Century of Evidence on Trend-Following Investing
Section 3: Performance over a Century
Exhibit 1 shows the performance of the time series momentum
strategy over the full sample since 1903 as well as for each decade
over this time period. We report the results net of simulated
transaction costs, and consider returns both before and after fees.
The performance has been remarkably consistent over an extensive
time horizon that includes the Great Depression, multiple
recessions and expansions, multiple wars, stagflation, the Global
Financial Crisis, and periods of rising and falling interest rates.
Skeptics argue that managed futures has benefited mainly from
the long secular decline in interest rates. While the strategy did
perform well over the past 30 years, the best performing decade
for the strategy occurred during the 1973-1982 period, when US
10 year treasury yields rose from 6.4% to 10.4% with extreme
volatility in between.
Our long-term out-of-sample evidence suggests that it is unlikely
that such price trends are a product of statistical randomness
or data mining. Indeed, the first eight decades of data is out-of-
sample evidence relative to the literature and the performance is
strong in each of these decades. Trends appear to be a pervasive
characteristic of speculative financial markets over the long term.
Trend-following strategies perform well only if prices trend
more often than not. A large body of research7
has shown that
price trends exist in part due to long-standing behavioral biases
exhibited by investors, such as anchoring and herding, as well
as the trading activity of non-profit seeking participants, such
as central banks and corporate hedging programs. For instance,
when central banks intervene to reduce currency and interest-
rate volatility, they slow down the rate at which information is
incorporated into prices, thus creating trends. The fact that trend-
following strategies have performed well historically indicates that
these behavioral biases and non-profit seeking market participants
have likely existed for a long time.
The returns to the strategy have exhibited low correlations to
stocks and bonds over the full time period, as well as in the
majority of sub-periods, as shown in Exhibit 1. Even more
impressively, the strategy has performed best in large equity
bull and bear markets. Exhibit 2 shows the annual hypothetical
returns to the strategy, plotted against the returns to the S&P
500 from 1903-2011. The “smile” shows that trend-following
has done particularly well in extreme up or down years for the
stock market. This strong performance in bear markets over the
century extends the evidence that has been documented since the
1980s, as exemplified most recently with the strong performance
of trend-following during the Global Financial Crisis.
7 Barberis, Shleifer, and Vishny (1998), Daniel, Hirshleifer, Subrahmanyam (1998),
De Long et al. (1990), Hong and Stein (1999) and Frazzini (2006) discuss a number
of behavioral tendencies that lead to the existence of price trends.
Exhibit 1: Hypothetical Performance of Time Series Momentum
Source: AQR. Please read important disclosures at the end relating to hypothetical performance and risks.
Strategy performance after simulated transaction costs both gross and net of hypothetical 2-and-20 fees.
Time Period
Gross of Fee
Returns
(Annualized)
Net of 2/20
Fee Returns
(Annualized)
Realized
Volatility
(Annualized)
Sharpe Ratio,
Net of Fees
Correlation to S&P
500 Returns
Correlation to US
10-year Bond
Returns
Full Sample:
Jan 1903 - June 2012 20.0% 14.3% 9.9% 1.00 -0.05 -0.05
By Decade:
Jan 1903 - Dec 1912 18.8% 13.4% 10.1% 0.84 -0.30 -0.59
Jan 1913 - Dec 1922 17.1% 11.9% 10.4% 0.70 -0.12 -0.11
Jan 1923 - Dec 1932 17.1% 11.9% 9.7% 0.92 -0.07 0.10
Jan 1933 - Dec 1942 9.7% 6.0% 9.2% 0.66 0.00 0.55
Jan 1943 - Dec 1952 19.4% 13.7% 11.7% 1.08 0.21 0.22
Jan 1953 - Dec 1962 24.8% 18.4% 10.0% 1.51 0.21 -0.18
Jan 1963 - Dec 1972 26.9% 19.6% 9.2% 1.42 -0.14 -0.35
Jan 1973 - Dec 1982 40.3% 30.3% 9.2% 1.89 -0.19 -0.40
Jan 1983 - Dec 1992 17.8% 12.5% 9.4% 0.53 0.15 0.13
Jan 1993 - Dec 2002 19.3% 13.6% 8.4% 1.04 -0.21 0.32
Jan 2003 - June 2012 11.4% 7.5% 9.7% 0.61 -0.22 0.20
5. AQR Capital Management, LLC FOR INVESTMENT PROFESSIONAL USE ONLY 4
A Century of Evidence on Trend-Following Investing
As another way to evaluate the diversifying properties of trend-
following investment during extreme events, we consider the
performance during peak-to-trough drawdowns for the typical
60-40 portfolio.8
Exhibit 3 shows the performance of the time
series momentum strategy during the 10 largest drawdowns
experienced by the traditional 60-40 portfolio over the past 110
years. We see that the time series momentum strategy experienced
positive returns in 9 out of 10 of these stress periods and delivered
8 The 60/40 portfolio has 60% of the portfolio invested in the S&P 500 and 40% invested
in US 10-year bonds. The portfolio is rebalanced to the 60/40 weights at the end of each
month, and no fees or transaction costs are subtracted from the portfolio returns.
significant positive returns during a number of these events.
The valuable hedging benefits that trend-following strategies
delivered during the Global Financial Crisis 2007-2009 do not
look unusual when you consider how the strategy has behaved
in other deep equity bear markets. Why have trend-following
strategies tended to do well in bear markets? The intuition is that
the majority of bear markets have historically occurred gradually
over several months, rather than abruptly over a few days, which
allows trend-followers an opportunity to position themselves
short after the initial market decline and profit from continued
market declines. In fact, the average peak-to-trough drawdown
length of the ten largest 60/40 drawdowns between 1903 and
2012 was approximately 18 months.
Given its attractive returns and diversifying characteristics,
allocating to a time series momentum strategy would have
significantly improved a traditional portfolio’s performance over
the past 110 years. Specifically, Exhibit 4 shows the simulated
effect of allocating 20% of the capital from a 60/40 portfolio to
the time series momentum strategy. We see that such an allocation
would have helped reduce the maximum portfolio drawdown,
lowered portfolio volatility, and increased portfolio returns.
Exhibit 4: Diversifying 60/40 with an
Allocation to Time Series Momentum
Source: AQR. Time Series performance is hypothetical as described above.
Performance characteristics of the 60/40 portfolio and a portfolio with 80%
invested in the 60/40 portfolio and 20% invested in the time series
momentum strategy, from January 1903 to June 2012.
Total Net of Fee
Returns
(Annualized)
Realized
Volatility
(Annualized)
Sharpe
Ratio, Net
of Fees
Maximum
Drawdown
60/40 Portfolio 8.0% 11.1% 0.34 -62%
80% 60/40 Portfolio,
20% Time Series
Momentum Strategy
9.5% 9.0% 0.57 -52%
Exhibit 2: Time Series Momentum “Smile”
Source: AQR. Time Series performance is hypothetical as described above. Please read important
disclosures at the end relating to hypothetical performance.
The annual net of fee returns of a time series momentum
strategy versus the S&P 500, 1903-2011.
-40%
-20%
0%
20%
40%
60%
80%
-50% -30% -10% 10% 30% 50%
TimeSeriesMomentumReturns
S&P 500 Returns
Exhibit 3: Total Returns of U.S. 60/40 Portfolio and Time Series Momentum
in the Ten Worst Drawdowns for 60/40 between 1903 and 2012
Source: AQR. Time Series performance is hypothetical as described above.
Panic of 1907
World War I
Post WWI
Recession Great
Depression
Recession of
1937-1938
Stagflation
Oil
Crisis
1987 Stock
Market Crash
Dot-com
Bubble
Bursting
Global
Financial
Crisis
-100%
-50%
0%
50%
100%
150%
Sep 1906 -
Nov 1907
Nov 1916 -
Dec 1917
Oct 1919 -
Jun 1921
Aug 1929 -
May 1932
Feb 1937 -
Mar 1938
Nov 1968 -
Jun 1970
Dec 1972 -
Sep 1974
Aug 1987 -
Nov 1987
Aug 2000 -
Sep 2002
Oct 2007 -
Feb 2009
60/40 Portfolio Returns Time-Series Momentum Returns
6. AQR Capital Management, LLC FOR INVESTMENT PROFESSIONAL USE ONLY 5
A Century of Evidence on Trend-Following Investing
Section 4: Strategy Outlook
While trend-following strategies have performed well over the
past 110 years, recent drawdowns have led to some concerns
about the current environment for the strategy. First, the assets
under management in these strategies have grown rapidly over the
past two decades and competition could potentially lower future
returns. Second, over the past three years there has been a lack of
clear trends – and even a number of sharp trend reversals – which
raises the question of whether the current economic environment
is simply worse for the strategy. We try to evaluate each of these
issues in turn.
To evaluate the effect of increased assets in the strategy, consider
BarclayHedge’s estimate that the assets managed by systematic
trend-followers has grown from $22B in 1999 to over $260B in
2012.9
While this growth is substantial, the size of the underlying
markets has also grown over the past decade. We estimate that
the aggregate size of positions held by trend-followers remains
a small fraction of the markets that they are invested in. If we
assume that all trend-following managers employ the identical
simple strategy we described, the average positions held would
amount to approximately 0.2% of the size of the underlying
equity markets, 3% of the underlying bond markets, 5% of the
underlying commodity markets, and 0.2% of the underlying
currency markets. Appendix C provides details on the data used
to estimate the aggregate size of the different markets. Even
with the significant growth in assets under management, trend-
followers appear to remain a modest fraction of the markets that
9 www.barclayhedge.com/research/indices/cta/mum/Systematic_Traders.html
they invest in. It seems unlikely that their trading activity would
have a material effect on the markets’ trend dynamics.
Following very strong performance in 2008, trend-following
strategies have experienced a few drawdowns from 2009-2012.
Does this recent performance imply that the environment today
is meaningfully worse for trend-following investing? Exhibit 5
shows the 10 largest historical drawdowns experienced by the
strategy since 1903, including the amount of time the strategy
took to realize and recover from each drawdown. We compute
the drawdown as the percentage loss since the strategy reached
its highest-ever cumulative return (its high-water mark). When
evaluated in this long-term context, the drawdowns experienced
within the past 3 years do not look unusually large. While recent
strategy performance has been disappointing, we do not find any
evidence that the recent environment has been anomalously poor
for the strategy relative to history.
While the performance of trend-following investing over the past
few years does not appear to be outside the normal range, it is
also useful to consider the potential effects the current economic
environment may have on the strategy. Over the past few years, the
“risk-on/risk-off” macroeconomic environment has led to higher
correlations both within and across asset classes. Exhibit 6 plots
the average pairwise correlation across all the markets used in our
strategy, showing how correlations have increased meaningfully
across markets since 2007, when the Global Financial Crisis
began. As markets have become more correlated, the strategy has
had fewer available independent trends to profit from, potentially
lowering its risk-adjusted returns, as is true for many investment
strategies.
Exhibit 5: The 10 Largest Drawdowns of Time Series Momentum between 1903 and 2012
Source: AQR. Time Series performance is hypothetical as described above.
The 10 largest peak-to-trough drawdowns of the time series momentum strategy, calculated using net of fee returns.
Rank
Start of
Drawdown
(Peak)
Lowest Point of
Drawdown
(Trough)
End of
Drawdown
(Recovery)
Size of Peak-
to-Trough
Drawdown
Peak-to-Trough
Length
(Months)
Trough-to-
Recovery
Length
(Months)
Peak-to-
Recovery
Length
(Months)
1 Mar-1947 Dec-1948 Mar-1954 -26.3% 21 63 84
2 May-1939 Jun-1940 Jul-1941 -20.7% 13 13 26
3 Oct-1913 Mar-1914 Oct-1914 -15.2% 5 7 12
4 Feb-1937 Apr-1937 Dec-1937 -14.4% 2 8 10
5 Oct-1916 Apr-1917 Nov-1917 -13.8% 6 7 13
6 Feb-2009 Jun-2009 Jul-2011 -13.5% 4 25 29
7 Jul-1910 May-1911 Dec-1912 -11.3% 10 19 29
8 Nov-1956 Mar-1957 Jul-1957 -11.2% 4 4 8
9 Oct-2001 Apr-2002 Jul-2002 -10.8% 6 3 9
10 Dec-1907 May-1909 Jul-1910 -10.4% 17 14 31
7. AQR Capital Management, LLC FOR INVESTMENT PROFESSIONAL USE ONLY 6
A Century of Evidence on Trend-Following Investing
However, even if the future Sharpe Ratio is expected to be lower
than historically observed, the strategy’s attractive diversification
characteristics continue to make it a potentially valuable addition
to a traditional portfolio. For instance, suppose we make a very
conservative assumption that the strategy will only realize a
Sharpe Ratio of 0.4 net of fees and transaction costs, meaning
that trend-following returns are less than half of what we have
observed historically.10
Under this assumption, allocating 20%
of a 60/40 portfolio to trend-following leaves portfolio returns
unchanged, lowers portfolio volatility from 11% to 9%, increases
the overall portfolio’s Sharpe ratio from 0.34 to 0.44, and reduces
the maximum drawdown from 62% to 53%.11
Moreover, there are a number of positive developments that
could benefit the strategy going forward. More competition
among market makers in the equity markets has vastly reduced
transaction costs.12
Over the last few years, there have been
changes in the currency and futures markets which have enabled
expanded competition for market making in those markets as well.
This should continue to help reduce trading costs going forward
for managers willing and able to invest in the proper trading
infrastructure. Second, while correlations have been high recently,
they are not inconsistent with several episodes in the past, after
10 While it is difficult to gauge with certainty, we feel that a 0.4 Sharpe Ratio
assumption is likely overly pessimistic for the strategy going forward. The main
message here is that even with very conservative expectations for returns to the
strategy, investors’ portfolios can still significantly benefit due to the powerful
diversification characteristics of the strategy.
11 Here we assume that the return distribution of the 60-40 portfolio is as in the past
century while time series momentum returns are lowered by a constant amount such
that returns average half of what they actually delivered.
12 Weston (2000), O’Hara and Ye (2009).
which they did return to more normal levels. Furthermore, even if
the major markets remain more correlated than in the past, there
are also now considerably more markets to diversify amongst than
throughout most of history, which should benefit trend-following.
For example, trend-followers can now invest in emerging equity
markets and emerging currency markets, which are much more
liquid than they were in the past. In addition, investors can now
access these strategies at lower fees than the 2 and 20 fee structure
we assumed in our strategy returns. Lastly, while the example
above assumes that the 60/40 portfolio will perform as well as it
has historically, given the current low real yield on bonds and the
high valuation of stocks, there are strong reasons to believe that
the 60/40 portfolio will not perform as well going forward, which
further makes the case for allocating a portion of one’s portfolio
to trend-following.
Section 5: Conclusion
Trend-following investing has performed well consistently over
more than a century, as far back as we can get reliable return
data for several markets. Our analysis provides significant out-of-
sample evidence beyond the substantial evidence already in the
literature (Moskowitz, Ooi, and Pedersen, 2012). This consistent
long-term evidence indicates that trends are pervasive features of
global markets.
Markets have tended to trend more often than not because of
investor behavioral biases, market frictions, hedging pressures,
and market interventions by central banks and governments.
Such market interventions and hedging programs are still
prevalent, and investors are likely to continue to suffer from the
same behavioral biases that have influenced price behavior over
the past century, setting the stage for trend-following investing
going forward.
Despite a century of very strong performance of trend-following
investing and the continued presence of biases and interventions,
the strategy’s expected return going forward may nevertheless
be hurt by several factors: increased assets under management
in the strategy, high fees, and higher correlations across markets.
However, the returns to investing in the strategy can be improved
if asset managers offer lower fees, invest in trading infrastructure
and strategy implementation that reduce transaction costs, and
obtain broader diversification by expanding the set of tradable
futures and forward contracts. The diversification benefits of the
strategy remain strong and we think offer a compelling case for a
modest allocation in an investor’s portfolio.
Exhibit 6: Average Pairwise Asset Correlations
Source: AQR. Time Series performance is hypothetical as described above.
The average absolute pairwise correlation across the
59 markets traded in the time series momentum strategy, calculated
using a rolling 3-year window.
0.0
0.1
0.2
0.3
0.4
0.5
0.6
8. AQR Capital Management, LLC FOR INVESTMENT PROFESSIONAL USE ONLY 7
A Century of Evidence on Trend-Following Investing
Appendix A: Markets and Data Sources
We use historical returns data from the following 59 markets in order to construct the time series momentum strategy:
Equity Indices
The universe of equity index futures consists of the following 11 developed equity markets: SPI 200 (Australia), S&P/TSE 60 (Canada),
CAC 40 (France), DAX (Germany), FTSE/MIB (Italy), TOPIX (Japan), AEX (Netherlands), IBEX 35 (Spain), FTSE 100 (U.K.), Russell
2000 (U.S.) and S&P 500 (U.S). Futures returns are obtained from Datastream and Bloomberg. We use MSCI country level index returns
and returns from Ibbotson and Global Financial Data (GFD) prior to the availability of futures returns.
Bond Indices
The universe of bond index futures consists of the following 15 developed bond markets: Australia 3-year Bond, Australia 10-year Bond,
Euro Schatz (2yr), Euro Bobl (5yr), Euro Bund (10yr), Euro Buxl (30yr), Canada 10-year Bond, Japan 10 year Bond (TSE), Long Gilt,
US 2-year Note, Italian 10-year Bond, French 10-year Bond, US 5-year Note, US 10-year Note and US Long Bond. Futures returns
are obtained from Datastream. We use country level cash bond returns from Morgan Markets and Global Financial Data (GFD) prior to
the availability of futures returns. We scale monthly returns from GFD to a constant duration of 4 years, assuming a duration of 2 years
for 2 and 3-year bond futures, 4 years for 5-year bond futures, 7 years for 10-year bond futures and 20 years for 30-year bond futures.
Currencies
The universe of currency forwards covers the following 9 exchange rates:, Australia, Canada, Germany spliced with the Euro, Japan,
New Zealand, Norway, Sweden, Switzerland, U.K., all versus the US dollar. We use spot and forward interest rates from Citigroup to
calculate currency returns going back to 1989 for all the currencies except for CAD and NZD, which go back to 1992 and 1996. Prior to
that, we use spot exchange rates from Datastream and IBOR short rates from Bloomberg to calculate returns.
Commodities
We cover 24 different commodity futures. Our data on Aluminum, Copper, Nickel, Zinc is from London Metal Exchange (LME), Brent
Crude, Gas Oil, Cotton, Coffee, Cocoa, Sugar is from Intercontinental Exchange (ICE), Live Cattle, Lean Hogs is from Chicago Mercantile
Exchange (CME), Corn, Soybeans, Soy Meal, Soy Oil, Wheat is from Chicago Board of Trade (CBOT), WTI Crude, RBOB Gasoline
spliced with Unleaded Gasoline, Heating Oil, Natural Gas is from New York Mercantile Exchange (NYMEX), Gold, Silver is from New
York Commodities Exchange (COMEX), and Platinum from Tokyo Commodity Exchange (TOCOM).
9. AQR Capital Management, LLC FOR INVESTMENT PROFESSIONAL USE ONLY 8
A Century of Evidence on Trend-Following Investing
Appendix A: Markets and Data Sources
The following chart shows the length and source of data for each individual market:
10. AQR Capital Management, LLC FOR INVESTMENT PROFESSIONAL USE ONLY 9
A Century of Evidence on Trend-Following Investing
Appendix B: Simulation of Fees and Transaction Costs
In order to calculate net-of-fee returns for the time series momentum strategy, we subtracted a 2% annual management fee and a 20%
performance fee from the gross-of-fee returns to the strategy. The performance fee is calculated and accrued on a monthly basis, but is
subject to an annual high-water mark. In other words, a performance fee is subtracted from the gross returns in a given year only if the
returns in the fund are large enough that the fund’s NAV exceeds its high water mark from the previous year.
The transactions costs used in the strategy are based on AQR’s current estimates of average transaction costs for each of the four asset
classes, including market impact and commissions. The transaction costs are assumed to be twice as high from 1993 to 2002 and six
times as high from 1903-1992, based on Jones (2002). The transaction costs used are as follows:
Appendix C: Estimation of the Size of Managed Futures Positions Relative to Underlying Markets
The current estimate of assets under management in the BarclayHedge Systematic Traders index is $260B. We then looked at the
average monthly holdings in each asset class (calculated by summing up the absoluate values of holdings in each market within an
asset class) for our time series momentum strategy, run at a NAV of $260B, and compared them to the size of the underlying cash or
derivative markets. For equities, we use the total global equity market capitalization estimate from the World Federation of Exchanges
(WFE) 2011 Market Highlights report. For bonds, we add up the total government debt outstanding for 18 of the most liquid government
bond markets, using Datastream data. For currencies, we use the total notional outstanding amount of foreign exchange derivatives
which are US dollar denominated in the first half of 2011 from the Bank for International Settlements (BIS) November 2011 report. For
commodities, we use the total notional of outstanding commodities derivatives, excluding options, in the first half of 2011 from the BIS
November 2011 report.
Asset Class Time Period
One-Way Transaction Costs
(as a % of notional traded)
1903-1992 0.36%
Equities 1993--2002 0.12%
2003-2012 0.06%
1903-1992 0.06%
Bonds 1993--2002 0.02%
2003-2012 0.01%
1903-1992 0.60%
Commodities 1993--2002 0.20%
2003-2012 0.10%
1903-1992 0.18%
Currencies 1993--2002 0.06%
2003-2012 0.03%
Average Position Size in $260B Time
Series Momentum Portfolio
(bn)
Total Market Size
(bn) Percentage of Total Market
Commodities 114 2,300 5.0%
Equities 93 47,000 0.2%
Bonds 598 23,000 2.6%
Currencies 107 54,000 0.2%
11. AQR Capital Management, LLC FOR INVESTMENT PROFESSIONAL USE ONLY 10
A Century of Evidence on Trend-Following Investing
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12. AQR Capital Management, LLC FOR INVESTMENT PROFESSIONAL USE ONLY 11
A Century of Evidence on Trend-Following Investing
Disclosures
The information set forth herein has been obtained or derived from sources believed by the author and AQR Capital Management,
LLC (“AQR”) to be reliable. However, the author and AQR do not make any representation or warranty, express or implied, as to the
information’s accuracy or completeness, nor does AQR recommend that the attached information serve as the basis of any investment
decision. This document has been provided to you for information purposes and does not constitute an offer or solicitation of an offer,
or any advice or recommendation, to purchase any securities or other financial instruments, and may not be construed as such. This
document is intended exclusively for the use of the person to whom it has been delivered by AQR and it is not to be reproduced or
redistributed to any other person. AQR hereby disclaims any duty to provide any updates or changes to the analyses contained in this
presentation.
Hypothetical performance results (e.g., quantitative backtests) have many inherent limitations, some of which, but not all, are described
herein. No representation is being made that any fund or account will or is likely to achieve profits or losses similar to those shown herein.
In fact, there are frequently sharp differences between hypothetical performance results and the actual results subsequently realized
by any particular trading program. One of the limitations of hypothetical performance results is that they are generally prepared with the
benefit of hindsight. In addition, hypothetical trading does not involve financial risk, and no hypothetical trading record can completely
account for the impact of financial risk in actual trading. For example, the ability to withstand losses or adhere to a particular trading
program in spite of trading losses are material points which can adversely affect actual trading results. The hypothetical performance
results contained herein represent the application of the quantitative models as currently in effect on the date first written above and
there can be no assurance that the models will remain the same in the future or that an application of the current models in the future will
produce similar results because the relevant market and economic conditions that prevailed during the hypothetical performance period
will not necessarily recur. There are numerous other factors related to the markets in general or to the implementation of any specific
trading program which cannot be fully accounted for in the preparation of hypothetical performance results, all of which can adversely
affect actual trading results. Discounting factors may be applied to reduce suspected anomalies. This backtest’s return, for this period,
may vary depending on the date it is run.
Diversification does not eliminate the risk of experiencing investment losses.
Past performance is not an indication of future performance.
There is a risk of substantial loss associated with trading commodities, futures, options, derivatives and other financial instruments.
Before trading, investors should carefully consider their financial position and risk tolerance to determine if the proposed trading style
is appropriate. Investors should realize that when trading futures, commodities, options, derivatives and other financial instruments
one could lose the full balance of their account. It is also possible to lose more than the initial deposit when trading derivatives or using
leverage. All funds committed to such a trading strategy should be purely risk capital.