Momentum Strategies in Futures Markets and Trend-following Funds
Robert Kosowski, Imperial College London UK
21st Sep 2012 11:30 am - Room 214/215, H69 - Economics and Business Building
In this paper we study time-series momentum strategies in futures markets and their relationship to commodity trading advisors (CTAs). First, we construct one of the most comprehensive sets of time-series momentum portfolios by extending existing studies in three dimensions: time-series (1974-2002), cross-section (71 contracts) and frequency domain (monthly, weekly, daily).
Our timeseries momentum strategies achieve Sharpe ratios of above 1.20 and provide important diversification benefits due to their counter-cyclical behaviour. We find that monthly, weekly and daily strategies exhibit low cross-correlation, which indicates that they capture distinct return continuation phenomena.
Second, we provide evidence that CTAs follow time-series momentum strategies, by showing that time-series momentum strategies have high explanatory power in the time-series of CTA returns.
Third, based on this result, we investigate whether there exist capacity constraints in time-series momentum strategies, by running predictive regressions of momentum strategy performance on lagged capital flows into the CTA industry. Consistent with the view that futures markets are relatively liquid, we do not find evidence of capacity constraints and this result is robust to different asset classes.
Our results have important implications for hedge fund studies and investors.