Trend Following with Managed Futures: The Search for Crisis Alpha

(16 customer reviews)

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,

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PDF

Pages

453

Published Date

2014

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Description

Trend Following with Managed Futures offers an insightful overview of both the basics and theoretical foundations for trend following. The book also includes in-depth coverage of more advanced technical aspects of systematic trend following. By focusing on the investor perspective, this book is a groundbreaking and invaluable resource for anyone interested in modern systematic trend following.

Introduction:

The book begins by telling the tale of trend following throughout the ages. A multi-centennial view of the strategy from a historical perspective sets the stage for the deeper more detailed analysis of modern systematic trend following in the remainder of the book. The book is divided into six core sections:

I. Historical Perspectives: Using a unique 800‐year dataset, trend following is examined from a multicentury perspective.

II. Introduction to Trend Following Basics: The goal of this section is to explain trend following system construction and the mechanics of trading in futures markets. Futures markets, futures trading, and the managed futures industry are reviewed. The basic building blocks of a modern systematic trend following system are discussed.

III. Theoretical Foundations: This section provides theoretical motivation for understanding why trend following works. The Adaptive Markets Hypothesis (AMH) is introduced and applied to derive and clarify the concept of crisis alpha. The concepts of divergent and convergent risk‐taking strategies are introduced. This section explains the concept of market divergence and its role in trend following performance. Given that trend following is applied in futures markets, the role of interest rates and the roll yield are also discussed.

IV. Trend Following as an Alternative Asset Class: Trend following is discussed as an alternative asset class. The key properties of trend following returns are discussed, including performance measures, crisis alpha, crisis beta, drawdowns, correlation, and volatility. The concept of hidden and unhidden risks, leverage risk with dynamic leveraging, and macro environments are explained.

V. Benchmarking and Style Analysis: This section discusses return dispersion, benchmarking, and style analysis. The idiosyncratic effects of parameter selection are linked to return dispersion in trend following. A divergent trend following index and three construction style factors are introduced. The divergent trend following index and style factors are used to demonstrate the applications of return based style analysis. Performance attribution, monitoring, appropriate benchmarking, manager selection, and manager allocation are applications of style analysis.

VI. Trend Following in an Investment Portfolio: This section discusses trend following from the investor’s perspective and advanced topics based on common themes earlier in the book. Topics include the role of equity markets in crisis alpha, the role of mark‐to‐market on inter‐manager correlation, aspects of size, liquidity, and capacity, as well as the move from pure trend following to multistrategy. Finally dynamic allocation, or the question of when to invest in trend following, is discussed.

Contents:

  • A Multicentennial View of Trend Following
  • Review of Futures Markets and Futures Trading
  • Systematic Trend Following Basics
  • Adaptive Markets and Trend Following
  • Divergence and the Tradability of Trend
  • The Role of Interest Rates and the Roll Yield
  • Properties of Trend Following Returns
  • Characteristics of Drawdowns, Volatility, and Correlation
  • The Hidden and Unhidden Risks of Trend Following
  • Trend Following in Various Macroeconomic Environments
  • Return Dispersion
  • Index and Style Factor Construction
  • Benchmarking and Style Analysis
  • Portfolio Perspectives on Trend Following
  • Practicalities of Size, Liquidity, and Capacity
  • Diversifying the Diversifier
  • Dynamic Allocation to Trend Following
Trend Following with Managed Futures: The Search for Crisis Alpha By Alex Greyserman, Kathryn Kaminski pdf
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16 reviews for Trend Following with Managed Futures: The Search for Crisis Alpha

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  1. Gracelyn Soto (verified owner)

    Given the quantitative background of the authors, I expected more mathematics in this book.
    There is not math here. It is not a quant book, nor a trading book. This is a theoretical finance book.
    However the book is written very well. All the concepts are clear and the plots are great.

  2. Grey Tyler (verified owner)

    This is more than a just book concerning futures trading. It is relevant to anyone interested in trend following regardless of the markets that one trades. The book does an admirable job of defining the basis of trend following as divergent risk taking in contrast to convergent strategies such as buy-and-hold. Trend following is a risk-minimizing way of dealing with uncertainty, as well as a way to capture crisis alpha.

    The authors show convincingly that non-optimized trend following can dramatically improve performance, and they do so over the longest back test I have ever seen covering 800 years of data. To me, that alone was worth the price of the book.

    Greyserman and Kaminski looked at 84 markets covering equities, fixed income, foreign exchange, and commodities as they became available from 1223 to 2013. They established long and short positions that were rebalanced monthly based on the trend over the preceding 12 months. They point out that moving averages, in contrast to their approach, may change signs often which can lead to unwanted trading and associated trading costs.

    Trend following showed an average annual return of 13% with an annual volatility of 11% and Sharpe ratio of 1.16, versus a return of 4.8%, volatility of 10.3%, and Sharpe ratio of 0.47 for buy-and-hold. Trend following also had positive skewness, while most asset classes without trend following have negative skewness. Positive skewness means less chance of large drawdowns.

    The largest drawdowns with trend following were approximately 25% lower than with buy-and-hold, and the duration of those drawdowns was 90% shorter. Trend following also showed positive performance during periods of market turmoil. It also had a low correlation with traditional asset classes, interest rate regimes, and inflation.

    I use a similar, long-only trend following method myself with stocks and bonds as described in my book, “Dual Momentum Investing”. I was therefore grateful to the authors for providing this impressive validation of trend following based on 800 years of data.

  3. Keenan Rowland (verified owner)

    This is probably the most in-depth book written on the subject of trend following futures strategies. Don’t mistake this work for a trading book. It’s really not. It’s a serious finance book. Also don’t mistake that statement for criticism.

    This book will not give you simple answers. It won’t give you ready-to-use trading systems or advise on how to get rich fast. This is a book for those who want to learn for real. Those who are looking for easy answers and lack the patience to do proper research will probably not make it through this book. Most readers will be challenged by the book. It will open your eyes to aspects of trend following that you probably hadn’t realized before.

    If you’re a serious market professional in the systematic trading field, or aspiring to become one, this is a book you need to read. There are plenty of books available that gives you easy solutions. Few of them work in reality. This is the book that will take you to a different level. It should spark new research areas and help you elevate your own research.

    In writing this book, the authors have shed welcome light on an all too often misunderstood industry. A highly recommended book.

  4. Julio Washington (verified owner)

    Great book.

    I recommend the readers of this book also read my book Profit from bull, bear and sideway markets . Its main strategy is a simple but profitable trend following. It is price-based concentrating on price movements and ignoring fundamentals. It shows you ‘HOW’ with step-by-step instructions starting with simplest SMA-50 with no charting – a free site calculates it for you. Then it includes SMA-200 and optionally other technical indicators such as RSI(14), MACD, Bollinger Band and Double Tops. All are available free from the internet.

    My other short-term strategies, strategy based on relative strengths, Sector Rotation and Momentum Investing, are also included in this book. Sector Rotation has 12 strategies from simple market timing, rotation of several sectors to top-down investing. Momentum strategies include contrarian, headline, earnings, short squeeze, year end, turnaround…

    It has over 400 pages. Check out the extensive Table of Contents. All chapters are practical and useful. Hence it is harder to read and you need to try out some techniques discussed. It has been the updated with the current market events and today’s available tools. It represents my many decades in investing and hundreds of books on trading. I only include those strategies that would most likely work in today’s market. This book is for both beginners and experts.

  5. Barrett Becker (verified owner)

    Cientifically oriented, clear, objective. Great, great book!

  6. Mavis Villegas (verified owner)

    Timeless guide for serious researchers in the Trend Following space.

  7. Clyde Lynch (verified owner)

    The most comprehensive and intelligent book on trend following for investment professionals so far.

  8. Malia Brock (verified owner)

    A very good overview and in-depth guide to a modern trend system. Highly recommended for practitioners.

  9. Emmett Mann (verified owner)

    Very thorough work. Worth every cent.

  10. Valerie Parrish (verified owner)

    I’ve read a ton of trading books and within that genre, trend following, but if I were you I would look elsewhere. It’s a long book chock full of important looking charts but I could not wait to finish it and I’m not sure there was much useful. Sorry, look elsewhere.

  11. Paislee Davila (verified owner)

    Best book I’ve read on trend following for insitutional allocators. I’ve met with Alex and Katy multiple times; truly leaders in their space. More thorough review to come..

  12. Alexandra Branch (verified owner)

    This is the worse book ever on trend following, can I give it a negative -5 stars. He goes into incredible academic analysis of trend following, yet he never defines what trend following he is using. So all the analysis is worthless. Is it TSMOM? Is it a moving average? Which one? Academic research that you can’t later validate is worthless. Quantitative Momentum by Wes Grey is a good book.

  13. Laura Bell (verified owner)

    This book gave an in-depth look at various aspects of the use of managed futures in portfolio management. It gets pretty technical but is very useful.

  14. Karsyn Ford (verified owner)

    I found it more of a brochure on the merits of trend following as opposed to a substantive look into actual trend following trading methods and strategies. If you need to convince yourself that trend following might be a good strategy then perhaps you might find this useful. Otherwise it is a dreary read with page after page of graphs recutting the same data and standard insights with lots of nearly useless statistical measures. Note as well that some of the glowing reviews come from interested parties who are, well, trend following publicists.

  15. Mason Davis (verified owner)

    Greyserman and Kaminski dig deep to answer why CTAs of the systematic trend following variety do what they do, why it works, and how it can improve diversification, risk control, and returns for a larger portfolio. As other have said, this is a book for those who really want to learn.

  16. Mia Murillo (verified owner)

    This is an excellent and compelling academic “proof” of Trend Following. The authors dig into the record of trend following for the last 800 years using a non optimized systematic approach and find that the returns are persistent. Good thing, since billions are traded in the trend following space.
    Though the book has a ton of economic formulas, you do not need to deconstruct them to understand the basic idea of what is being shown.
    The sections of the book deconstruct methods; risk management types and time frames; high and low interest rate environments etc.
    Very interesting is the discussion of divergent versus convergent risk taking, and the research showing that divergent risk taking is stable over time.
    If you are interested in actual system building and the other aspects of managing a fund, read “Following the Trend: Diversified Managed Futures Trading” by Andreas Clenow, but for foundation information, exploring variations and academic research proving the method you need to read this book as well.

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