Trend Following, 5th Edition

23 Black Box Trend Following—Lifting the Veil

Nigol Koulajian Paul Czkwianianc

Quest Partners LLC

The goal of this research series is to demystify specific black box CTA trend following strategies and to analyze their characteristics both as a stand-alone product as well as within a portfolio of typical financial instruments.

Synopsis

The goal of this paper is to help CTA investors familiarize themselves with black box trend following strategies. The paper highlights the sensitivity of returns to some of the optimizations that are available.

Specifically, we will

1. Provide transparent CTA black box trend following trading strategies, including specific parameters, markets to be traded, and risk management strategies.
2. Analyze the source of returns of such trading strategies and compare their returns to the Barclays BTOP 50 Managed Futures Index (BTOP50) and the S&P 500 Index (SP500).
3. Break down performance per sector and per trade direction 
(long vs. short).
4. Investigate the stability of the parameters used.
5. Explore the capacity of such strategies to hedge stock market risk.

Some of our findings are:

1. Simple, liquid, and fully transparent CTA strategies such as moving average crossovers and channel breakouts explain most of the returns of the BTOP50. These strategies are stable across parameters.
2. These simple strategies compare favorably to the BTOP50 and the SP500 both in terms of returns and risk-adjusted returns.
3. These strategies have positive skew. They tend to benefit ...