Trend Following with Managed Futures

An all-inclusive guide to trend following

As more and more savvy investors move into the space, trend following has become one of the most popular investment strategies. Written for investors and investment managers, Trend Following with Managed Futures offers an insightful overview of both the basics and theoretical foundations for trend following. The book also includes in-depth coverage of more advanced technical aspects of systematic trend following. The book examines relevant topics such as:
* Trend following as an alternative asset class
* Benchmarking and factor decomposition
* Applications for trend following in an investment portfolio
* And many more

By focusing on the investor perspective, Trend Following with Managed Futures is a groundbreaking and invaluable resource for anyone interested in modern systematic trend following.

Foreword xi
Andrew W. Lo
Preface xv
Introduction xxi
Part I Historical Perspectives
Chapter 1 A Multicentennial View of Trend Following 3
The Tale of Trend Following: A Historical Study 5
Return Characteristics over the Centuries 8
Risk Characteristics over the Centuries 17
Portfolio Benefits over the Centuries 19
Summary 21
Appendix: Included Markets and Relevant Assumptions 21
Further Reading and References 23
Part II Trend Following Basics
Chapter 2 Review of Futures Markets and Futures Trading 27
Forward and Futures Contract Fundamentals 27
Review of the Managed Futures Industry 34
Futurization 38
Summary 43
Further Reading and References 43
Chapter 3 Systematic Trend Following Basics 45
The Basic Building Blocks of a Trend Following System 47
Strategy Classification and Core Differentiators 56
Partitioning Trend Following Systems 60
Summary 61
Further Reading and References 61
Part III Theoretical Foundations
Chapter 4 Adaptive Markets and Trend Following 65
The Adaptive Market Hypothesis 66
A Framework for Speculative Risk Taking 75
A Closer Look at Crisis Alpha 78
Summary 91
Further Readings and References 91
Chapter 5 Divergence and the Tradability of Trend 93
Risk versus Uncertainty 93
Convergence versus Divergence 95
Measuring Market Divergence at the Portfolio Level 106
Testing the Stationarity of Market Divergence 114
The Tradability of Trend 117
The Importance of Entry versus Exit 121
Summary 124
Further Reading and References 124
Chapter 6 The Role of Interest Rates and the Roll Yield 127
Collateral Yield 128
Decomposition into Roll Yield and Spot 131
Summary 138
Further Reading and References 139
Part IV Trend Following as An Alternative Asset Class
Chapter 7 Properties of Trend Following Returns 143
Trend Following as an Alternative Asset Class 143
Crisis Alpha 145
Crisis Beta 149
Key Statistical Properties 155
Summary 159
Appendix: A Summary of Common Performance Measures 160
Further Reading and References 161
Chapter 8 Characteristics of Drawdowns, Volatility, and Correlation 163
Understanding the Properties of Drawdowns 163
Volatility of a Trend Following Portfolio 173
Correlation and Diversification at the Portfolio Level 181
Summary 185
Further Reading and References 186
Chapter 9 The Hidden and Unhidden Risks of Trend Following 187
Directional and Nondirectional Strategies: A Review 187
Defining Hidden and Unhidden Risks 188
The Myths and Mystique of the Sharpe Ratio 195
Unraveling Hidden Risks of Dynamic Leveraging 196
Summary 207
Further Reading and References 207
Chapter 10 Trend Following in Various Macroeconomic Environments 209
Interest Rate Environments 210
Regulatory Forces and Government Intervention 217
Postcrisis Recovery 221
Summary 228
Further Reading and References 229
Part V Benchmarking and Style Analysis
Chapter 11 Return Dispersion 233
Strategy Classification and Return Dispersion 234
A Closer Look at Capital Allocation and Position Sizing 239
Return Dispersion from an Investor's Perspective 247
Empirical and Theoretical Considerations for Correlated Return Series 256
Summary 263
Further Reading and References 264
Chapter 12 Index and Style Factor Construction 265
Divergent Risk Taking Revisited 266
Defining a Divergent Trend Following Strategy 269
Constructing Style Factors 277
Characteristics of the Style Factors 282
Summary 286
Further Reading and References 287
Chapter 13 Benchmarking and Style Analysis 289
A Framework for Return-Based Style Analysis 290
Style Analysis for Individual CTA Managers 294
Sector Level Analysis of the Market Size Factor 299
Style Analysis Clarifications 304
Manager Selection and Allocation 310
Summary 313
Further Reading and References 313
Part VI Trend Following in an Investment Portfolio
Chapter 14 Portfolio Perspectives on Trend Following 317
A Closer Look at Crisis Alpha 317
The Impact of Mark-to-Market on Correlation 326
Understanding Volatility Cyclicality 329
Summary 334
Further Reading and References 335
Chapter 15 Practicalities of Size, Liquidity, and Capacity 337
Does Size Matter? 337
The Impact of Less Liquid Markets 345
Summary 351
Appendix: Market Symbols and Names 352
Further Reading and References 352
Chapter 16 Diversifying the Diversifier 353
From Pure Trend Following to Multistrategy 354
Portfolio Analysis of the Move to Multistrategy 358
Hidden Risk of Leveraging Low-Volatility Strategies 368
Summary 374
Further Reading and References 374
Chapter 17 Dynamic Allocation to Trend Following 375
A Framework for Dynamic Allocation 375
Mean Reversion in Trend Following Return Series 377
Investigating Dynamic Allocation Strategies 384
Summary 389
Appendix: A Theoretical Analysis of Mean Reversion in Trend Following 390
Further Reading and References 393
Glossary 395
About the Authors 407
Index 409