What are quantitative strategies?
Quantitative, or “quant,” strategies select securities based on
prespecified sets of rules. These rules are based on quantifiable evidence,
informed by a combination of proprietary analysis and academic research.
Quant strategies are then executed based on where current prices are
trading relative to the rules of the quantitative framework. For example, a
simple quantitative value strategy may rely entirely on a quantifiable
measure of value (e.g., price-to-book ratio), rather than on the manager’s
forecast of the future price to instruct buy or sell decisions. In this
way, quant strategies differ from discretionary strategies, which
consistently rely on the skill of the investment manager to make investment
decisions at every step of the way.
Are all quant strategies “black boxes”?
While it’s true that some quant managers consider specific details of their
implementation strategy proprietary and are not willing to disclose their
“secret sauce,” not all strategies rely on top-secret algorithms to make
money. In fact, the majority of quant strategies are based on widely
understood principles and well-researched pricing anomalies, such as
momentum, value and carry, which are difficult to time and are best
accessed through a rules-based approach. Managed futures strategies focus
on momentum through a rules-based approach, rather than an opaque “black
box.” Though managers typically don’t publish all details of their rules,
they are generally relatively transparent regarding the substance of the
models, making these strategies more like “glass boxes” than “black boxes.”
Additionally, managed futures is often offered in liquid and relatively
What is managed futures?
A type of quant strategy, managed futures employs trend-following across
asset classes. Trend-following is also referred to as “momentum” investing.
Momentum investing contrasts with the more familiar “value” investing that
seeks to buy low and sell high. In contrast, momentum investors seek
positions in securities that have moved in one direction for a period of
time – either up or down. They join the trend, taking long positions in
assets that are going up in price, and short positions in assets whose
prices are declining.
Momentum investors use quantitative signals to define when securities are
trending. Often, these signals compare the current (spot) price of an asset
to the trailing (historical) moving average of the price. If the spot price
is above the moving averages, then the security is in an uptrend, and vice
While most managed futures strategies focus on time series momentum, there
are different types of momentum strategies:
- Time-series momentum strategies use trailing signals of past prices to
construct portfolios of trending securities that can be directional based
on the nature of the trend signals (e.g., short equities as equities trend
- Cross-sectional momentum strategies look at a set of securities relative
to each other and take long positions in those with relatively positive
momentum and short positions in securities with relatively negative
momentum. This type of strategy is most commonly executed on single stocks
in equity markets.
Why does trend-following work?
A well-studied anomaly in academic literature, beginning with Jegadeesh and
Titman, 1993,1 momentum is a recognized phenomenon across global
asset classes. And in practice, it has worked remarkably well over long
periods of time, generating positive returns with low correlations to
stocks and bonds, and especially strong positive returns during equity bear
markets. But if everyone knows about it, why does it work?
There are some interesting behavioral reasons that are thought to cause
momentum to persist over time and across asset classes:
New information takes time to be fully reflected in security
prices, which leads to price trends as global investors adjust
- The over-reaction or “bandwagon” effect can push winners to trend
higher and losers to trend lower for a period of time.
There’s also the “disposition effect” in which investors tend to
hold on to losers and sell winners. In other words, investors tend
to gamble with losses to try to earn back their money, but tend to
become risk-averse with winners to take profits while they can.
Both effects can drive trends by increasing the time it takes for
prices to reflect fundamental information.
Investors tend to behave the same way in response to significant
regime shifts, especially in risk-off markets. For example, when
equity markets have large sell-offs, many investors tend to reduce
risk across their portfolios, which can lead to trending prices
across global asset classes.
What’s in the managed futures “box”?
While all managed futures strategies focus on quantitative trend-following,
not all trend-following strategies are designed the same. Managed futures
strategies commonly vary along the following dimensions:
The universe of securities: How many securities does the manager
access and what is the tradeoff between diversification and
Asset classes often included in managed futures strategies
are equities, fixed income, currencies, and commodities.
Defining trend signals: How long are the “look back windows” used
to determine whether a security is trending?
Shorter windows lead to higher turnover and potentially
stronger performance in risk-off markets since they adapt
to new trends quickly;
Longer windows lead to lower frequency strategies with
The choices that managers make for which securities to include and which
trend signals to follow can cause performance to vary quite a bit among
managed futures managers. It’s important that investors understand each
manager’s relative advantage when investing in trend-following strategies
to make sure that a particular managed futures strategy will align with
their investment objectives.
Why do investors allocate to managed futures?
Managed futures strategies have a unique profile relative to other
potential investments, including:
Long-term positive historical returns of a similar magnitude to
Very low correlations to equities and other global asset classes;
Strong historical performance during equity bear markets.
As a result, an allocation to managed futures can have a powerful impact on
broader portfolios by potentially increasing returns, reducing risk and
That said, it is important to keep in mind that managed futures strategies
are relatively volatile. While this volatility is likely to reduce risk in
a broader portfolio context, it can be significant on a standalone basis.
Most managers target levels of volatility between 10–20%, with some
variation in those targets over shorter periods.
Another important consideration is that managed futures strategies may not
provide a buffer against sudden, short-lived market moves or “flash
crashes.” Although these strategies have the potential to be highly
diversifying and tend to perform best over periods of prolonged market
sell-offs, they cannot be relied on to hedge against sudden market moves.
Essentially, if the strategy doesn’t have enough time to identify the
trend, then it may not be positioned to profit from it, and may in fact
have losses if a sharp move is in the opposite direction of previous
For most investors, a 5–15% allocation to managed futures may offer a good
balance of diversification and volatility. Over the long term, the
volatility of most managed futures strategies will be closer to that of
equities than that of core bonds, and this size of allocation generally may
be enough to “move the needle” positively in most portfolio allocations.
“Returns To Buying Winners and Selling Losers: Implications for Stock
Market Efficiency,” Narasimhan Jegadeesh and Sheridan Titman, The Journal of Finance, March 1993.