CTA algo squeeze

Discussion in 'Automated Trading' started by chart pig, Feb 13, 2019.

  1. raddo

    raddo

    That's a very clever question indeed ...

    Hard to answer, but a few months ago, I have read one interesting research paper which deals with that question:

    an Hemert: The MOM-TOM Effect: Detecting the Market Impact of CTA Trading
    http://papers.ssrn.com/sol3/papers.cfm?abstract_id=2515900
    Abstract:
    Motivated by the explosive growth in CTA assets under management, in combination with the recent poor performance of many managers in this sector, we explore whether the trend-following trading style employed by many CTAs has become crowded. Explicitly, we test for market impact using the following hypothesis: around the turn of the month (TOM), trend-following (MOM) strategies digest sizeable inflows, causing the managers to trade up their existing positions, thereby pushing prices temporarily in their favor. The main empirical test is whether there is an above average return for MOM strategies on TOM days, which we refer to as the MOM-TOM effect. We found a very strong MOM-TOM effect in the Newedge Trend Index returns, with 90% of cumulative returns since 2000 being realized on the three TOM days. In addition, a replicating strategy we designed to closely track the Newedge Trend Index displayed a strong MOM-TOM effect.

    Basically, the logic is, that if a lot of CTA's rebalance monthly, then the most probable day for rebalancing is the first day of the month. If this theory is right, then you can basically front-run CTAs :)
     
    #11     Feb 15, 2019
    qlai likes this.