Can Economic Factors Improve Momentum Trading Strategies? The Case of Managed Futures during the COVID-19 Pandemic

Renata Guobužaitė,Deimantė Teresienė

doi:10.3390/economies9020086

Abstract

Systematic momentum trading is a prevalent risk premium strategy in different portfolios. This paper focuses on the performance of the managed futures strategy based on the momentum signal across different economic regimes, focusing on the COVID-19 pandemic period. COVID-19 had a solid but short-lived impact on financial markets, and therefore gives a unique insight into momentum strategies’ performance during such critical moments of market stress. We offer a new approach to implementing momentum strategies by adding macroeconomic variables to the model. We test a managed futures strategy’s performance with a well-diversified futures portfolio across different asset classes. The research concludes that constructing a portfolio based on academically/economically sound momentum signals with its allocation timing based on broader economic factors significantly improves managed futures strategies and adds significant diversification benefits to the investors’ portfolios.

Highlights

From difficult lessons learned in 2008, the traditional “suspects” in institutional investors’ portfolios face a significant problem
We offer a new approach to momentum strategies because we found that the momentum strategy’s performance could be improved if broader macroeconomic variables were added to the analysis
To evaluate the managed futures strategy that is based on momentum effect, we c4o.n1s.tMruocmt enthtuemtiFmacetorsseries that is based on the adaptive time-series momentum” (ATSMOM) (“adaptive time-series momeTnotuemva”l)ufaatcetotrhaesmdaenscargibeeddfuintuErleasutstarnadteEgyrdtőhsa’st (i2s0b1a9s)epdapoenr.mToomgeetnatunminteifaflecset,nwsee ocfotnhsetsruercitetshpeetrimfoermsearniecse,thwaet ipslboat siteadgoanintshtethAeTbSeMnOchMm(a“rakdSaGptTivreentidmIen-dseerxie. sTmheoSmGenTtruemnd”) Sfuabc-tIonrdaesxdiessacrsibuebdseitnoEflathuet aSnGdCETrdAosIn’sd(e2x01d9e)spiganpeedr. tTootrgaectkanthient1i0allsaerngesesto(fbtyheAsUeMrie)s trpeenrdfo-rfomllaonwcein, wg eCpTloAtsit aangdainrsetptrheesebnent cthhme amrkoSmGeTnrteunmd Ifnodlleoxw

Summary

Introduction

From difficult lessons learned in 2008, the traditional “suspects” in institutional investors’ portfolios (i.e., equity, fixed income) face a significant problem. Opportunities to diversify the portfolio become very limited. As investors seek to diversify into other asset classes, many turn to alternative assets as a solution, with managed futures strategies firmly in focus. We test the performance of managed futures strategies based on a theoretically proven momentum effect across different asset classes. This research aims to identify if the construction of a portfolio, based on academically/economically sound momentum signals, and its allocation timing based on broader economic factors, can significantly improve the performance of managed futures strategies and add significant diversification to investors’ portfolios. The particular focus is placed on the recent COVID-19 period as a natural experiment of increased market uncertainty

Objectives

Methods

Results

Conclusion