The efficacy of ETF momentum strategies, while robust until around 2010, began to show signs of waning in subsequent years. This observation raises questions about the sustainability and adaptability of these strategies in varying market cycles. Central to this research is exploring how various factors/parameters—such as the ranking period, the selection quantity of assets, and the liquidity of ETFs—impact the performance of ETF momentum strategies. The aim is to uncover whether these strategies can deliver sustainable alpha in the complex and ever-evolving market landscape of the 2020s.

More and more, a few mega-cap companies dominate the US stock market performance. Financial journals come up with different names for those stocks every few years. They are now called the “Magnificent Seven”, but we all remember FAANG, right? Naturally, several questions arise – Is the current status quo, when the stock market capitalization is highly concentrated among the few extremely large companies, an exception or rule over history? And what’s the impact of this concentration on the performance of the one particular factor – the Size premium? We present the research paper written by Emery and Koëter that tries to answer those questions. 

Forex markets lure retail traders into a game of “hunting pips” with high leverage and high turnover scalping strategies, in which small traders often lose more than they can afford. But there are other ways of trading currencies. The smart money knows how to exploit interest rate spreads that this asset class offers by employing the FX Carry Trade strategy. In the past decade, the low interest rates of the most developed countries made the FX Carry strategy less profitable, but as inflation returned, higher interest rates returned in some countries, too, and with them, the interest rate spreads widened. And FX Carry is back, and the question stands: Can we improve this well-known trading style?

Two weeks ago, we promised you a surprise, and now it’s finally time to unveil what we have prepared for you :).

Our Quantpedia Awards 2024 aims to be the premier competition for all quantitative trading researchers. If you have an idea in your head about systematic/quantitative trading or investment strategy, and you would like to gain visibility on the professional scene, then submit your research paper, and you can compete for an attractive list of prizes. All info about the prizes, submission process, expert committee, and our partners are described in detail on our dedicated subpage: Quantpedia Awards 2024. But we will also give you a quick overview in this blog post.

Commodity Trading Advisor (CTA) funds are commonly associated with managed futures investing; however, beyond commodities, they have the flexibility to venture into other assets, including interest rates, currencies, fixed income, and equity indices. Most of the CTA strategies are trend-following, taking long positions in markets experiencing upward trends and short positions in markets undergoing downward trends, with the expectation that these trends will persist. CTA funds demonstrate a negative correlation with traditional assets, especially evident during periods of pronounced downturns in equity markets, and this characteristic positions them as an appealing alternative investment option, serving as a protective measure against extreme events in financial markets. We aim to explore these trend-following strategies by creating a “CTA proxy” using ETFs across all asset classes. Using ETFs allows for maintaining the diversification of CTA funds and represents an alternative with easier data availability compared to futures contracts. Additionally, we are very interested in seeing the contribution of the short leg of CTA sub-strategies to performance, as we have a hypothesis that we can significantly improve the risk-return profile of the CTA strategies by removing a short leg portion of the strategy from some assets.

The primary motivation behind our study stems from an observation of the Global Tactical Asset Allocation (GTAA) strategies throughout the existing papers – the majority of them require relatively frequent rebalancing from the point of view of the ordinary investor. Portfolio rebalancing is usually done on a weekly or monthly basis, and while this period may seem overly boring and slow for the majority of traders (who like to trade on intraday or daily basis), fans of GTAA strategies are not traders; they are investors. Of course, some like to follow the ebbs and flows of the market. But a lot of investors just want to have a life. The financial market is not their hobby. However, on the other hand, they also do not want to hold just the passive buy & hold portfolio. Recognizing the demand for the semi-active strategy, we introduce our novel Pragmatic Asset Allocation.