London Systematic Advisors : Futures Statistical Arbitrage

Summary

The Futures Statistical-Arbitrage Strategy has an investment objective to achieve positive absolute returns, with low correlation to any major bond, equity, currency, or broad market hedge fund index and other CTAs over intermediate term holding periods. To achieve this, the Strategy employs a fully systematic, algorithmic trading approach that utilizes a number of human-understandable trading sub-strategies. As such, while the sub-strategies are computerized they are not “black-boxes” and many of the concepts come from applications that aren’t commonly applied to managed futures. The focus is to trade only highly liquid exchange traded futures and spot foreign exchange to allow for liquidity and transparency. At present 34 futures markets and five cash currencies are traded (currently for hedging only). Overall average holding periods are around 7 days, but vary from sub-strategy between 3-30 days.

Investment Strategy

There are a number of sub-strategies that are generally sector specific and range from mean-reversion to momentum on both an outright and relative basis. The sub-strategies are intended to have low correlation to each other to achieve a smoother return profile than the typical CTA. The sub-strategies are derived from approaches not typically used to trade managed futures. The volatility target is 10% annualized based on daily gross returns. The combination of relatively uncorrelated strategies and and systematic risk allocation should result in draw-downs which are much better behaved than typical managed futures programs.

Risk Management

Risk is re-sized daily at three levels based on both volatility and correlation as it emerges cross-market and cross-strategy: Market, sub-strategy and inter-strategy, so that the absolute exposure is within the specified limits. As well strategies which take outright market positions have intra-day stops, while those that take relative positions have daily stops on the relative exposure.