Constructing Diversified Futures Trading Strategies

In this chapter and the next two, I demonstrate how extremely simple strategies can be used to achieve results very close to what the big managed futures managers display. Some large futures funds treat their proprietary strategies as if they are photos of the Roswell alien landing and like to talk about how they have vast staffs of PhDs and massive research budgets, and in most cases this is true. The question you should ask, however, is just how big a difference this really makes. Once you reach the size of having a few hundred million under management, hiring a staff of researchers to improve details is a good idea, but in fact a single person can replicate the bulk of the returns with some decent software and a bit of hard work.

I describe two very basic trend-following strategies using the most common approaches to capturing trends. I then make some slight adjustments to these strategies and combine them into a single, and more realistic, strategy. I analyse the resulting strategy in detail and compare it with the results of the big-name futures funds.

Through this exercise I intend to show that you don’t need complicated mathematics to construct a working trend-following portfolio strategy and that the exact buy-and-sell rules are largely irrelevant. The concept is important but the common focus on entry and exit rules is misguided.


I make the somewhat bold claim in this book that the ...

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