Position sizing methods for a trend following CTA

Abstract: This study examines whether a trend following managed futures fund can improve its performance by changing its position sizing method. Trades for a simple trend following strategy was simulated on 47 futures contracts over the period 1990-2012, using varying methods for determining position size. Eleven different position sizing methods where investigated, among them Target Volatility, Omega Optimization and correlation ranking methods. Both methods previously detailed in academic papers as well as novel approaches was implemented, and compared to the baseline performance of the strategy. The results from this study show that the Target Volatility method, and to some degree Max Drawdown Minimize and Dynamic Stop Lock-In, improved the performance of strategy. The final recommendation for a trend following managed futures fund is to use Target Volatility as position sizing method, possibly in conjunction with Max Drawdown Minimize.