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Digital Subscriptions > The Hedge Fund Journal > Issue 109 - November 2015 > Historical Analysis of CTA Performance in Q4

Historical Analysis of CTA Performance in Q4

Relating returns to trends

One issue faced by fund managers is developing expectations for the future returns of their products. This task for TAs is made more complicated by the fact that many strategies are designed to be uncorrelated to conventional market indices, benchmarks and indicators. An approach to generating such a forecast is to relate strategy returns to bespoke factors that pertain to the known characteristics of the strategy (e.g., trend following or mean reversion). If some of these factors can themselves be predicted with accuracy, then in principal that prediction can be extrapolated to the returns of the strategy.


While CTA returns tend to be uncorrelated to commonly used factors (such as Fama-French factors), it is possible to follow this approach and define custom indicators that have explanatory value. An example of this is a market trend index: if markets exhibit strong, persisting trends, one would expect trend following CTAs to perform well. If trends are weak or nonexistent, trend following CTAs ought to have flat or negative performance. This effect can be measured quantitatively.

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