Investment strategies of CTAs can be broken into three distinct groups: (1) trend following, (2) relative value, and (3) discretionary. However, various academic and industry studies have shown that there exists one dominant factor explaining a large portion of CTA returns, and this dominant factor appears to be highly correlated with basic trend-following investment strategies. In other words, trend followers dominate the CTA industry, and even discretionary traders may employ some type of trend-following strategy within their portfolios of investment strategies.

Trend-following strategies are rather similar to the market-timing strategies used in the equity markets, in which the investment manager takes long (or short) positions in those futures contracts that are trending up (or down). There are, however, two subtle differences between market-timing and trend-following strategies. First, market-timing strategies may involve some degree of fundamental analysis. For instance, a market timer may examine changes in credit spreads, money supply, and the term structure of interest rates to forecast a change in the direction of equity markets. A trend follower's actions, however, are predominantly based on technical analysis, using data on past prices and volume to determine whether recent price changes constitute a trend in futures prices. Second, a market timer wants to anticipate a change in the market's direction, while a trend follower wants to determine ...

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