Managed Futures is not High Frequency Trading

One of the most common questions we get asked when someone is first learning about Managed Futures is whether Managed Futures and High Frequency trading are one in the same. To that, we say: not in the slightest.

HFT and systematic trend-following CTAs both use computer algorithms, but that’s where the similarities end. HFT programs typically issue thousands of orders per second, and frequently hold positions for only a few seconds. Their objective is to profit off of small variations in price – earning a tiny profit on each trade, multiplied over thousands or tens of thousands of trades per day. These HFT programs are usually competing against each other to make these trades as quickly as possible – leading to a virtual arms race of faster computers and connections to the markets.

But for managed futures, algorithms are used in a very different way. Systematic trend following CTAs employ algorithms to help determine their entry and exit points into a trade.  This kind of algorithmic trading isn’t the “10,000 canceled orders per second” variety of HFT. Trend followers are hoping to ride big outlier moves, holding their trades for days or weeks at a time. Algorithms in the world of systematic trend followers are simply the mathematical, pattern-recognizing tools that CTAs use to identify potentially profitable trades. But there are hundreds of programs out there, all with different techniques and holding periods. Trades can last days, weeks, and even months! So what is the average holding period for the everyday Managed Futures strategy?

It just so happens the AIMA research paper we’ve been highlighting recently (here and here) has just the chart. Societe Generale created their own trend indicator which tracks their own index which follows Trend Followers in the CTA space:

The Societe Generale Trend Indicator in figure is a hypothetical market based portfolio designed to produce a high correlation to trend following managed futures strategies. Since its inception in 2000, it has recorded a correlation to the SG Trend Index of more than 0.7. The trend Indicator is built on a bottom up basis and therefore allows analysis of trend following returns by attributing them to indicative market positions.

Based on that – Soc Gen says the average holding day is 90 days – or three months:

By studying how long managed futures strategies hold their trading positions for, we can determine whether or not they are high frequency in their nature. Figure (11) below shows the average holding period for the Societe Generale Trend Indicator. As we can observe, on average a typical trend following CTA holds the same position on a single futures contract for on average of approximately 90 days. Whilst there are fluctuations in the average holding period of CTA portfolios, as they are rebalanced over time, they cannot be considered high frequency.

It is interesting to note that it seems like the average holding period has been slowly declining over the years, with CTAs having an average holding period right around 60 in 2016– the lowest in its range (see chart above). It will be interesting to see if this will develop into a trend, where trend following strategies doesn’t stay in trades as long, or whether we will see a spike in holding periods like in 2008 and 2014 (both years of heavy crude oil moves) (disclaimer: Past performance is not necessarily indicative of future results).

Finally, all of this is to say that the SG Trend Indicator follows specifically trend following CTAs, and not all the different categories and sub-categories. But even the short-term traders that we work with have a trading range of 0-5 days, but High-Frequency traders could be trading hundreds of thousands of times in one day.

All this is to say this chart only displays one portion of the Managed Futures space — and isn’t indicative of the holding periods of all CTAs. To learn more about all the different Managed Futures categories and subcategories, download of Managed Futures strategy review.

The performance data displayed herein is compiled from various sources, including BarclayHedge, and reports directly from the advisors. These performance figures should not be relied on independent of the individual advisor's disclosure document, which has important information regarding the method of calculation used, whether or not the performance includes proprietary results, and other important footnotes on the advisor's track record.

Benchmark index performance is for the constituents of that index only, and does not represent the entire universe of possible investments within that asset class. And further, that there can be limitations and biases to indices such as survivorship, self reporting, and instant history.

Managed futures accounts can subject to substantial charges for management and advisory fees. The numbers within this website include all such fees, but it may be necessary for those accounts that are subject to these charges to make substantial trading profits in the future to avoid depletion or exhaustion of their assets.

Investors interested in investing with a managed futures program (excepting those programs which are offered exclusively to qualified eligible persons as that term is defined by CFTC regulation 4.7) will be required to receive and sign off on a disclosure document in compliance with certain CFT rules The disclosure documents contains a complete description of the principal risk factors and each fee to be charged to your account by the CTA, as well as the composite performance of accounts under the CTA's management over at least the most recent five years. Investor interested in investing in any of the programs on this website are urged to carefully read these disclosure documents, including, but not limited to the performance information, before investing in any such programs.

Those investors who are qualified eligible persons as that term is defined by CFTC regulation 4.7 and interested in investing in a program exempt from having to provide a disclosure document and considered by the regulations to be sophisticated enough to understand the risks and be able to interpret the accuracy and completeness of any performance information on their own.

RCM receives a portion of the commodity brokerage commissions you pay in connection with your futures trading and/or a portion of the interest income (if any) earned on an account's assets. The listed manager may also pay RCM a portion of the fees they receive from accounts introduced to them by RCM.

See the full terms of use and risk disclaimer here.