Advanced Trading Rules

Abstract

THE JOURNAL OF ALTERNATIVE INVESTMENTS 91 F or stock and bond investments, previous research has linked mutual fund performance with underlying market returns. However, when it comes to non-traditional investment vehicles such as hedge funds and managed futures, very little attention has been given to describing the fundamental factors determining hedge fund or managed futures returns. This is important for several reasons. First, hedge funds and, more specifically, commodity trading advisors, have different trading styles (e.g., long and short positions) or trading opportunities (e.g., commodity and financial markets) than traditional stock and bond mutual fund managers. As a result, compared to stock and bond funds, other factors such as trending market prices or market volatility may better capture their relative return movement. Advanced Trading Rules, edited by Emmanual Acar (a well-respected professional proprietary trader with Dresdner Kleinwort) and Stephen Satchell (a Cambridge University academic), puts together twelve leading investment professionals and academics who present a wide range of examples as current ideas on the application of trading rules and trading system designs. More precisely, the book contains five chapters on the underlying return process of various futures and options markets and how various trading rules or strategies may or may not capture the underlying return patterns. In the second section, three authors (in three chapters) test whether advances in trading systems such as artificial neural networks, traditional trading rules such as head and shoulders, and fundamental economic information can be beneficial in developing profitable trading rules in the foreign exchange market. In the final section, four chapters are presented in which the benefits of actual technical trading systems are reviewed and the performance of managed futures programs are analyzed in terms of their underlying trading style. This collection of articles is important. While previous research has indicated the potential benefits of including managed futures and hedge funds in stock and bond portfolios, the unique explanatory return factors, especially systematic trading rules, that led to the differential return comovement of managed futures and hedge funds with traditional stock and bond funds has not been fully explored. While none of the articles produce gold out of lead, they do show how modern alchemists treat their art. As important for asset managers as it is for academics, the book provides a look into how our competitors are moving forward. But, let the buyer beware, for some of these articles you may need to refresh your knowledge of college statistics or bribe your college-age son or daughter to explain some of the specifics of ∑, λ, and ∞.