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Bridge over ocean
19 December 2018 Financial Analysts Journal Volume 75, Issue 1

Trends’ Signal Strength and the Performance of CTAs

  1. Gert Elaut
  2. Péter Erdős

We propose a new asset-based factor that relies on aggregating momentum signals over different horizons. Aggregating signals this way captures assets’ trend signal strength, thereby addressing a limitation in existing time series momentum strategies. Our factor mimics a trend-following manager that increases exposure to markets where trends develop and decreases exposure to markets where trends fade. Taking into account a number of practical implementation issues, we found that our proposed factor performs better at replicating the stylized facts of Commodity Trading Advisors’ returns than previous methods and allows a more meaningful assessment of fund alpha.

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