Managed futures look to be moving up in class, with the most recent edition of the Economist mentioning managed futures in an article talking about how momentum can work. And while it is nice to see managed futures mentioned in a magazine just slightly more respected and read than Futures magazine (sarcasm intended) – the mention unfortunately leaves a little to be desired, as it does little more than make the seemingly obligatory references to John Henry, Winton, and AHL.
The managed futures portion is below, and you can read the full piece here: http://www.economist.com/node/17848665?story_id=17848665&fsrc=rss
It is hardly a surprise that the momentum effect has been exploited by some professionals for decades. Commodity trading advisers (CTAs), also known as managed futures funds, exist to exploit the phenomenon. They take advantage of trends across a wide range of asset classes, including equities and currencies as well as raw materials. Martin Lueck was one of the three founders of AHL, one of the more successful CTAs, and now works for another trend-follower, Aspect Capital. “Trends occur because there is a disequilibrium between supply and demand,” he says. “The asset is trying to get from equilibrium price A to equilibrium price B.”
Many of the trend-following models were developed in the late 1970s and early 1980s. They were exploited by investors such as John Henry, best known outside the financial world for owning a baseball team, the Boston Red Sox, and a football club, Liverpool (which is on a downward trend of its own). One of the simplest was to buy an asset when the 20-day moving average of its price rose above its 200-day average. In a recent study Joëlle Miffre and Georgios Rallis of the Cass Business School in London found 13 profitable momentum strategies in commodity markets with an average annual return of 9.4% between 1979 and 2004.
Modern CTAs like Aspect and Winton (run by David Harding, another founder of AHL) devote a lot of effort to researching new ways of exploiting momentum. That has sometimes meant trading faster and faster, with a time horizon of milliseconds rather than months. However, not all market movements are part of a trend. Some are merely random fluctuations. “As you trade faster, it is easier to get misled by the noise,” says Mr Lueck. Trend-followers can get “whipsawed” in volatile markets, buying at the top of a short-term trend and then selling at a loss shortly afterwards.
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