Tracking speculative trading

Abstract

Managed futures funds are predominantly trend-followers. By analyzing positioning data, we provide novel evidence for this claim and estimate signals applied by these funds. We write trend-followers aggregate position as a weighted sum of past daily returns and use a generalized ridge regression for regularization and parameter estimation. This procedure prevents overfitting but remains flexible enough to capture various patterns. For the 23 commodities considered, trend-following can explain speculators’ position changes with an average $R^2$ of more than 40%. Finally, we document that producers act as contrarians in a way that closely mirrors the behavior of momentum traders.