01 Nov Learning From Quest Partners' "Black Box Trend Following – Lifting the Veil"

CTA performance can be broadly replicated with simple trend following strategies.

In this article, Absolute Momentum will be used interchangeably with trend following or time series momentum. Relative Momentum will be used interchangeably with cross-sectional momentum or relative strength.

The paper finds that:

Simple, liquid and fully transparent CTA strategies such as moving average crossovers and channel breakouts explain most of the returns of the BTOP50. These strategies are stable across parameters.

These simple strategies compare favorably to the BTOP50 and the SP500 both in terms of returns and risk adjusted returns.

These strategies have positive skew. They tend to benefit from increases in volatility and SP500 down moves.

In the past 20 years, most of the returns of these strategies have come from long trades, the fixed income sector and longer term trading frequencies. Optimizing around these data points should be done with care.

CTAs have a tendency to hedge stock market corrections without necessarily giving back returns during the SP500 up months.

CTA strategies have long term positive returns and strong insurance characteristics

Research Paper: Black Box Trend Following – Lifting the Veil

Authors: Nigol Koulajian, Paul Czkwianianc

Company: Quest Partners