Adaptive Time Series Momentum: An Objective Benchmark for Systematic Trend-Following Strategies

Abstract

We propose a market-based benchmark for Managed Futures funds that relies on simple time series momentum strategies. Our benchmark mimics managers’ allocation process by increasing exposure when trends are developing and decreasing exposure when trends are fading by allocating to short and long-term trend-following strategies simultaneously. In addition, we take into account transaction costs, allowing a meaningful assessment of fund alpha. Our approach offers investors an alternative to widely used manager-based CTA benchmarks. Our model outperforms the explanatory power of existing market-based factor models applied to Managed Futures funds.