Water

Research

Solent Systematic has a number of enlightening research papers which are viewable by clicking on the links below:

TREND FOLLOWING, RISK PARITY AND MOMENTUM IN COMMODITY FUTURES

Steve Thomas, Andrew Clare, James Seaton, Peter Smith

We show that combining momentum and trend following strategies for individual commodity futures can lead to portfolios which offer attractive risk adjusted returns which are superior to simple momentum strategies; when we expose these returns to a wide array of sources of systematic risk we find that robust alpha survives. Experimenting with risk parity portfolio weightings has limited impact on our results though in particular is beneficial to long-short strategies; the marginal impact of applying trend following methods far outweighs momentum and risk parity adjustments in terms of risk-adjusted returns and limiting downside risk. Overall this leads to an attractive strategy for investing in commodity futures and emphasises the importance of trend following as an investment strategy in the commodity futures context.

BREAKING INTO THE BLACKBOX: TREND FOLLOWING, STOP LOSSES, AND THE FREQUENCY OF TRADING: THE CASE OF THE S&P500

Steve Thomas, Andrew Clare, James Seaton, Peter Smith

In this paper we compare a variety of technical trading rules in the context of investing in the S&P500 index. These rules are increasingly popular both among retail investors and CTAs and similar investment funds. We find that a range of fairly simple rules, including the popular 200-day moving average trading rule, dominate the long only, passive investment in the index. In particular, using the latter rule we find that popular stop loss rules do not add value and that monthly end of month investment decision rules are superior to those which trade more frequently: this adds to the growing view that trading can damage your wealth. Finally we compare the MA rule with a variety of simple fundamental metrics and find the latter far inferior to the technical rules over the last 60 years of investing.

THE TREND IS OUR FRIEND: RISK PARITY, MOMENTUM AND TREND FOLLOWING IN GLOBAL ASSET ALLOCATION

Steve Thomas, Andrew Clare, James Seaton, Peter Smith

We examine the effectiveness of applying a trend following methodology to global asset allocation between equities, bonds, commodities and real estate. The application of trend following offers a substantial improvement in risk-adjusted performance compared to traditional buy-and-hold portfolios. We also find it to be a superior method of asset allocation than risk parity. Momentum and trend following have often been used interchangeably although the former is a relative concept and the latter absolute. By combining the two we find that one can achieve the higher return levels associated with momentum portfolios but with much reduced volatility and drawdowns due to trend following. We observe that a flexible asset allocation strategy that allocates capital to the best performing instruments irrespective of asset class enhances this further.

REDUCING SEQUENCE RISK USING TREND FOLLOWING AND THE CAPE RATIO

Steve Thomas, Andrew Clare, James Seaton, Peter Smith

The topic of pension savings and decumulation is of growing importance in many parts of the world as companies retreat from defined benefit schemes, leaving investment and withdrawal decisions to individuals. Some economists have focused their attention on this important topic by proposing ever more creative accumulation and decumulation strategies. These strategies include frameworks for combining deferred annuities, state benefits, and guaranteed annuity type income, along with flexible income from investmentsof varying degrees of risk. These approaches, however, are generally silent on the type of investment strategy needed for a successful accumulation and decumulation experience with risky assets. Instead, they tend to create risk-free benchmarks of index-linked bonds (see Sexauer, Peskin and Cassidy 2012). In our view designing a savings and decumulation strategy without giving careful consideration to investment strategy is like designing all the elements of a car – chassis, gearbox, braking system, and so on – except the engine!

TREND FOLLOWING VALUE VS GROWTH: SIZE MATTERS: TAIL RISK, MOMENTUM, AND TREND FOLLOWING IN INTERNATIONAL EQUITY PORTFOLIOS

Steve Thomas, Andrew Clare, James Seaton, Peter Smith.

In this article we explore the small-firm effect using MSCI style indexes for both developed and emerging markets for the period since 1995 and show how overlaying relative momentum and trend following strategies can substantially enhance both absolute and risk-adjusted returns.