Trend Following with Managed Futures: The Search for Crisis Alpha

PRAISE FOR TREND FOLLOWING WITH MANAGED FUTURES WOW!! Everything you ever wanted to know about trend following over the past 800 years, from the theoretical to the practical, can be found in this book. If you are contemplating an allocation to or redemption from CTAs, you should read this book first. Ed Robertiello, CFA, Senior Portfolio Manager, Absolute Return Strategies, CalPERS Alex Greyserman and Kathryn Kaminski have provided a full insight into trend following models in simple language and with examples throughout this book. They have demystified the black box notion associated with managed futures/trend followers. Romule Nohasiarisoa, CFA, Senior Hedge Fund Analyst, PGGM Pension Fund, Netherlands Alex and Kathryn are prolific researchers in the world of managed futures and manager selection. This work is a significant contribution to the understanding of CTA performance and is a must read for anyone interested in analyzing CTA returns. Adam Duncan, Senior Investment Director, Cambridge Associates This book is a fascinating and timely examination of an investment strategy that, for too long, has dwelt in the shadows of the financial industry. Every serious investor should read this book! Andrew Lo, PhD, Charles E. and Susan T. Harris Professor of Finance, MIT Sloan School of Management This is a must have on the bookshelf of any institutional investor. Alex and Kathryn bring academic rigor to CTA investing in an easily digestible and understandable framework. Lawrence Kissko, Head of Macro and Quantitative Strategies, Hermes BPK Partners

Foreword Andrew W. Lo Preface Introduction Part I: Introduction Chapter 1: A Multi–Centennial View of Trend Following The Tale of Trend Following: A Historical Study Return Characteristics over the Centuries Risk Characteristics over the Centuries Portfolio Benefits over the Centuries Summary Further Reading and References Appendix: Included Markets and Relevant Assumptions Part II: Trend Following Basics Chapter 2: Review of Futures Markets and Futures Trading Forward and Futures Contract Fundamentals Review of the Managed Futures Industry Futurization Summary Futures Reading and References Chapter 3: Systematic Trend Following Basics The Basic Building Blocks of a Trend Following System Strategy Classification and Core Differentiators Partitioning Trend Following Systems Summary Further Readings and References Part III: Theoretical Foundations Chapter 4: Adaptive Markets and Trend Following The Adaptive Market Hypothesis A Framework for Speculative Risk Taking A Closer look at Crisis Alpha Summary Further Reading and References Chapter 5: Divergence and the Tradability of Trend Risk vs. Uncertainty Convergence vs. Divergence Measuring Market Divergence at the Portfolio Level Testing the Stationarity of Market Divergence The Tradability of Trend The Importance of Entry vs. Exit Summary Further Reading and References Chapter 6: The Role of Interest Rates and the Roll Yield Collateral Yield Decomposition into Roll Yield and Spot Interest Rates and the Roll Yield for Bond Futures Market Divergence and the Roll Yield Commodity Markets and the Roll Yield Summary Further References and Readings Part IV: Trend Following as an Alternative Asset Class Chapter 7: Properties of Trend Following Returns Trend Following as an Alternative Asset Class Crisis Alpha Crisis Beta Key Statistical Properties Summary Featured Readings and References Appendix: A Summary of Common Performance Measures Chapter 8: Characteristics of Drawdowns, Volatility, and Correlation Understanding the Properties of Drawdowns Correlation and Diversification at the Portfolio Level Summary Further Reading and References Chapter 9: The Hidden and Unhidden Risks of Trend Following Directional and Non–Directional Strategies: A Review Defining Hidden and Unhidden Risks The Myths and Mystique of the Sharpe Ratio Unraveling Hidden Risks of Dynamic Leveraging Summary Further Reading and References Chapter 10: Trend Following in Various Macroeconomic Environments Interest Rate Environments Regulatory Forces and Government Intervention Summary Further Reading and References Part V: Benchmarking and Style Analysis Chapter 11: Return Dispersion Strategy Classification and Return Dispersion A Closer Look at Capital Allocation and Position Sizing Return Dispersion from an Investor’s Perspective Empirical and Theoretical Considerations for Correlated Return Series Summary Further Readings and References Chapter 12: Index and Style Factor Construction Divergent Risk Taking Revisited Defining a Divergent Trend Following Strategy Constructing Style Factors Characteristics of the Style Factors Summary Further Readings and References Chapter 13: Benchmarking and Style Analysis A Framework for Return based Style Analysis Style Analysis for Individual CTA Managers Sector Level Analysis of the Market Size Factor Manager Selection and Allocation Summary Further Readings and References Part VI: Trend Following in an Investment Portfolio Chapter 14: Portfolio Perspectives on Trend Following A Closer Look at Crisis Alpha The Impact of Mark–to–Market on Correlation Understanding Cyclicality in Managed Futures Summary Further Reading and References Chapter 15: Practicalities of Size, Liquidity, and Capacity Does Size Matter? The Impact of Less Liquid Markets Summary Further Readings and References Appendix: Market Symbols and Names Chapter 16: Diversifying the Diversifier From Pure Trend Following to Multi–Strategy Portfolio Analysis of the Move to Multi–Strategy Hidden Risk of Leveraging Low Volatility Strategies Summary Further Reading and References Chapter 17: Dynamic Allocation to Trend Following A Framework for Dynamic Allocation Mean Reversion in Trend Following Return Series Investigating Dynamic Allocation Strategies Summary Further Reading and References Appendix: A Theoretical Analysis of Mean Reversion in Trend Following Glossary of Key Terms About the Authors Index

ALEX GREYSERMAN, P H D, is Chief Scientist at ISAM and serves as Adjunct Professor in the Graduate Program in Mathematical Finance at Columbia University. KATHRYN M. KAMINSKI, P H D, is the Deputy Managing Director of the Institute for Financial Research (SIFR), external market commentator for the CME Group, and affiliated faculty at the Stockholm School of Economics.