momentum strategies in futures markets and trend-following.pdf

MOMENTUM STRATEGIES IN FUTURES MARKETS AND TREND-FOLLOWING FUNDS AKINDYNOS-NIKOLAOS BALTAS AND ROBERT KOSOWSKI Centre for Hedge Fund Research, Risk Management Laboratory Imperial College Business School Working Paper 11 Date: 6/2012 Momentum Strategies in Futures Markets and Trend-following Funds † ‡ AKINDYNOS-NIKOLAOS BALTAS AND ROBERT KOSOWSKI First Version: December 10, 2011 This Version: June 11, 2012 ABSTRACT In this paper we study time-series momentum strategies in futures markets and their relation- ship 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 time- series 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 phenom- ena. 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 mo- mentum strategies, by running predictive regressions of momentum strategy performance on lagged capital flows into th