This chapter has examined the economic foundations for the sources of returns to trend-following strategies. It has argued that futures markets are not strictly zero-sum games if one considers the positions that some market participants have in the spot markets. In other words, some market participants may be willing to accept losses in the futures markets when those losses are offset by gains in other markets. This can be one potential source of return to trend-following strategies. The chapter also discussed the potential behavioral reasons for the presence of trends in futures prices. Investors may not always behave in the rational manner assumed by supporters of the efficient market hypothesis. Under some circumstances, such behavior could lead to trends in security prices, and systematic CTAs may be in a position to take advantage of these trends.

1 For surveys of the literature on the theory of storage, see Gray and Rutledge (1971) and Carter (1999).

2 For further discussion, see Pindyck (2001), Sørensen (2002), and Feldman and Till (2006). In addition, a number of papers have modeled convenience yield as a call option on stock-out; see Milonas and Thomadakis (1997) and Zulauf, Zhou, and Robert (2006).

3 See Erb and Harvey (2006), Miffre and Rallis (2007), and Gorton and Rouwenhorst (2006).

4 This implies that often one needs a model of risk and return before it is determined whether a particular market is efficient.

5 Private information could be relevant ...

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