Multi-Market CTA Programs
In order to work with the millions of pieces of information our brains are bombarded with every day, people subdivide and categorize data.
There is no such thing as a 'general' band; it is either a jazz band, a string quartet, or one of the many kinds of rock such as 'oldies,' hard rock, a pop cover band, and so on.
The same thing is true with stock mutual funds.
Every fund is labeled based on its focus: it's an emerging markets fund, a technology fund, a small cap fund, large cap fund, etc.
Although some people try to avoid categorizing, Attain Capital attempts to categorize different CTA programs by various styles of trading, and highlights a specific, promising futures trading system every so often in their Strategy Focus newsletters.
For their publication, they have invented their own category named Systematic Multi-Market Commodity Traders / Managed Futures Programs.
It's a mouthful, and don't feel bad if you're not clear what it means.
As with other crossover categories such as 'country rock' or a highly-diversified mutual fund, you may not always find a perfect, existing category to place a new entity into.
Trend Followers - On the Way Out? Most of the managed futures programs discussed here were once popularly known as trend followers.
However, this categorization does not fit them aptly because the strategies have changed and expanded whereas they now move contrary to trends, trade within very short time periods, and so on.
For these reasons the category called 'trend follower' is slowly going extinct, even though a recent Wall Street Journal news story specifically referred to 'Trend Following Funds,' which could refresh the vitality of the name for a while longer.
The names that were dropped in the WSJ article are well-known staples within the managed futures community, including Campbell & Co, John W.
Henry, and Winton Capital; names that manage billions and billions utilizing strategies that can - in general at least - be called 'trend following.
' Basically, the 'trend follower' strategy borders a market with a technique such as moving averages that include 90% of the price action within the market.
Then, the strategy calls for a long trade after the prices of the market go up above the upper limit - which signals a fresh trend upwards - and to execute a short trade (that is, place a wager that prices will fall) after the prices of the market prices descend down through the low limit - which indicates a fresh trend downward.
'Trend following' strategies usually remain in the transaction until market prices stabilize to something like the 100-day moving average.
Historically speaking, these strategies have been an effective way determine trades in the markets, and have driven many successful anecdotes within the futures trading industry - e.
g.
the Turtle Traders or John Henry.
The disadvantage to trend following - and the reason that many larger companies do not like to follow the strictly defined strategy - is that 'trend following' often reacts too slowly in detecting profitable trends, or getting out of the trades before significant profits are eaten up.
The tactic of reacting after-the-fact has caused drastic downturns as the trend follower strategy waits too long past optimal profitability in order to end a trade.
Analyzing five years' worth of actual trades of well-known strategists such as Dunn Capital or John W.
Henry demonstrates that trend followers had rough times for most of 2004 through 2006.
Why would this occur when the prices of commodities were in a clear and definite 'trend' over that timeframe? One reason is that the overall 'trend' was not constant and smooth; they experienced sharp fluctuations throughout the period.
For example, crude oil experienced several jags of approximately 50% on the way up to memorable, record high prices.
Can we blame the hedge funds for 'profit taking,' which would otherwise have kept the trend line above the moving average? No matter what the complicated set of factors were, it definitely negatively affected the 'trend following' strategists.
Since the major players were hurting - or at least not profiting as much as had been anticipated - the quantity of CTAs subscribing to the trend-follower strategies shrank, and more and more investors moved over to alternative strategies - such as options trading - which were performing much better during that period.
However, rather than giving up on the trend following techniques, many managers evolved and adapted.
By shortening the trading timeframe, they applied the strategies to periods as short as a few days in duration.
They added filters to their analyses to eliminate losing trades during periods of low volatility.
Traders also moved into new, sometimes more exotic, commodities, such as Japanese rubber or Malaysian palm oil.
Mostly though, they simply became more patient and analytical, and waited for the desired levels of volatility to come back.
There is no such thing as a 'general' band; it is either a jazz band, a string quartet, or one of the many kinds of rock such as 'oldies,' hard rock, a pop cover band, and so on.
The same thing is true with stock mutual funds.
Every fund is labeled based on its focus: it's an emerging markets fund, a technology fund, a small cap fund, large cap fund, etc.
Although some people try to avoid categorizing, Attain Capital attempts to categorize different CTA programs by various styles of trading, and highlights a specific, promising futures trading system every so often in their Strategy Focus newsletters.
For their publication, they have invented their own category named Systematic Multi-Market Commodity Traders / Managed Futures Programs.
It's a mouthful, and don't feel bad if you're not clear what it means.
As with other crossover categories such as 'country rock' or a highly-diversified mutual fund, you may not always find a perfect, existing category to place a new entity into.
Trend Followers - On the Way Out? Most of the managed futures programs discussed here were once popularly known as trend followers.
However, this categorization does not fit them aptly because the strategies have changed and expanded whereas they now move contrary to trends, trade within very short time periods, and so on.
For these reasons the category called 'trend follower' is slowly going extinct, even though a recent Wall Street Journal news story specifically referred to 'Trend Following Funds,' which could refresh the vitality of the name for a while longer.
The names that were dropped in the WSJ article are well-known staples within the managed futures community, including Campbell & Co, John W.
Henry, and Winton Capital; names that manage billions and billions utilizing strategies that can - in general at least - be called 'trend following.
' Basically, the 'trend follower' strategy borders a market with a technique such as moving averages that include 90% of the price action within the market.
Then, the strategy calls for a long trade after the prices of the market go up above the upper limit - which signals a fresh trend upwards - and to execute a short trade (that is, place a wager that prices will fall) after the prices of the market prices descend down through the low limit - which indicates a fresh trend downward.
'Trend following' strategies usually remain in the transaction until market prices stabilize to something like the 100-day moving average.
Historically speaking, these strategies have been an effective way determine trades in the markets, and have driven many successful anecdotes within the futures trading industry - e.
g.
the Turtle Traders or John Henry.
The disadvantage to trend following - and the reason that many larger companies do not like to follow the strictly defined strategy - is that 'trend following' often reacts too slowly in detecting profitable trends, or getting out of the trades before significant profits are eaten up.
The tactic of reacting after-the-fact has caused drastic downturns as the trend follower strategy waits too long past optimal profitability in order to end a trade.
Analyzing five years' worth of actual trades of well-known strategists such as Dunn Capital or John W.
Henry demonstrates that trend followers had rough times for most of 2004 through 2006.
Why would this occur when the prices of commodities were in a clear and definite 'trend' over that timeframe? One reason is that the overall 'trend' was not constant and smooth; they experienced sharp fluctuations throughout the period.
For example, crude oil experienced several jags of approximately 50% on the way up to memorable, record high prices.
Can we blame the hedge funds for 'profit taking,' which would otherwise have kept the trend line above the moving average? No matter what the complicated set of factors were, it definitely negatively affected the 'trend following' strategists.
Since the major players were hurting - or at least not profiting as much as had been anticipated - the quantity of CTAs subscribing to the trend-follower strategies shrank, and more and more investors moved over to alternative strategies - such as options trading - which were performing much better during that period.
However, rather than giving up on the trend following techniques, many managers evolved and adapted.
By shortening the trading timeframe, they applied the strategies to periods as short as a few days in duration.
They added filters to their analyses to eliminate losing trades during periods of low volatility.
Traders also moved into new, sometimes more exotic, commodities, such as Japanese rubber or Malaysian palm oil.
Mostly though, they simply became more patient and analytical, and waited for the desired levels of volatility to come back.
Source...