I have been studying the impact of futures on cash markets for decades, so I was very interested in the new short piece of research, “How Futures Trading Changed Bitcoin Prices” FRBSF Economic Letter 2018-12 May 7, 2018 that was published this week.
Trend-following, as applied to managed futures, has been around for decades. Yet, there is no universal agreement on what is or should be a trend-following benchmark that can serve as the strategy beta or as a trend-following strategy factor. A trend-following benchmark can be used to measure the factor-beta of any manager. I can be […]
I would not be the first person to engage in the lazy thinking that managed futures are synonymous with trend-following. For many years, there was little wrong with using both terms to mean the same thing. The majority of managed futures are still trend-following.
Equity factor risk premium ranks change through time. The best performing factor premium today may not be the best premium tomorrow even if there are long-term gains across major factors. Most investors would agree with this statement; however, the dispersion of factor performance is more complex.
The current buzzword used with quant investing is “machine learning.” Many quants may like to appear more intelligent by peppering their strategy discussions with comments like, “We use machine learning to create new and enhance our existing models.” Yet many investors don’t fully appreciate that machine learning is a term that refers to a broad […]
Along with any discussion of asset bubbles, there is a complementary discussion concerning tail risk. If there is a bubble, there is likely to be a tail in the future. Bubbles and tails are tied together, yet tail events can occur even if there is no bubble.
The marketplace is abuzz with the value of momentum trading, but a closer inspection shows that it is packaged in two major strains, time series and cross-sectional momentum. The traditional trend-following CTA focuses on time series momentum while the most of the equity research and implementation is conducted through the cross-sectional approach. There is similarity between these approaches, but there are also enough differences so that the return profile for each will not be the same.
“Enough with this diversification talk, I’ve got my 60/40 and I am happy!” The 60/40 stock/bond portfolio mix has become a standard reference or benchmark for many investors, yet its performance versus a truly diversified portfolio is mixed.
There are many works on managed futures that explain the basics of this hedge fund strategy, but the characteristics need to be reinforced especially at current times when the strategy is underperforming other hedge fund strategies. The core reason for holding managed futures is that it provides useful diversification. This diversification is not available from other strategies and this diversification will be especially present during ‘bad times” of a equity decline. Don’t forget that those strategies that have more systematic risk will need to generate higher returns. Investors will be paid to hold them. On the flip-side, there will be a “payment” for managed futures which does well in “bad times”.
We have already focused on the US Marine Corps’ approach to risk management. Still, the Marine Corps is not alone in the military in formalizing approaches to decision-making under uncertainty. The US Army addresses the issue with a variation on the problem in its risk management manual. Again, the focus is on process and discipline, […]
Is it worth trading two highly correlated equity indices? The correlation between the Euro STOXX 50 and 600 is generally above .95, so most would argue that the two are interchangeable. There is a significant difference in the volume of each futures contract, so liquidity may not be the same. Hence, some would argue that it is reasonable to choose one, but a closer look will show that there are spread opportunities across the two indices no different than the equity spread opportunities in the US based on size or industry mix. Spread trades in index futures offer a way to increase the opportunity set of returns in ways that are often uncorrelated with traditional directional bets.
As measured by a well-watched peer group index, the managed futures hedge fund strategy is in a significant drawdown. Despite this, money is still flowing as investors have taken a forward-looking view of what this strategy will do if there is a sell-off in major asset classes like equities. Of course, indices do not represent […]
Don’t worry, be happy and without stress. The ECB Composite Index of Systematic Stress (CISS) measures declining stress in the EU. While there is a big disclaimer with the ECB risk dashboard that this is not an early warning system, the declining trend tells a story of stability. This index serves as a European equivalent […]