Trend Following Made Easy: How to Create a CTA from Scratch

Abstract

CTAs have generated strong returns in 2022 and regained investors’ interest in improving portfolio diversification. However, given their nature of being simultaneously long and short multiple asset classes, and constantly changing their portfolios, they often are viewed as black-box strategies. We show that CTA performance can be approximately replicated top-down by using just four asset classes, as well as by creating a CTA bottom-up utilizing 59 indexes. Neither process is complicated and both increase transparency on the investment process and portfolio construction of CTAs, which may help investors become more comfortable with this investment strategy.