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New Managers June 2012

Peter Urbani' Statistics - Sell in May and buy a CTA.

 

Sell in May and buy a CTA

You will no doubt all be familiar with the old market adage - Sell in May and go away. This month, we examine this strategy and come up with a couple of suggestions of our own - specifically we suggest that one should Sell in May and Buy a CTA.

The exact origin of the phrase Sell in May and go away is unknown. However its usage has been traced back as far as the early 1930s and there is now a considerable body of research investigating the origins and efficacy of this old market aphorism.

One such study by Jacobsen and Zhang, Are Monthly Seasonals Real? A Three Century Perspective, finds that - "Over 300 years of UK stock returns reveal that well-known monthly seasonals are sample specific. For instance, the January effect only emerges around 1830, which coincides with Christmas becoming a public holiday. Most months have had their 50 years of fame, showing the importance of long time series to safeguard against sample selection bias, noise, and data snooping. Only - yet undocumented - monthly July and October effects do persist over three centuries, as does the half yearly Halloween, or Sell-in- May effect. Winter returns - November through April - are consistently higher than (negative) summer returns, indicating predictably negative risk premia. A Sell-in-May trading strategy beats the market more than 80% of the time over 5 year horizons."

Another by Haggard and Witte entitled The Halloween Effect: Trick or Treat? finds that the Halloween effect is robust to consideration of outliers and the "January effect."

Whatever the exact causes of these seasonal effects, and we suspect largely behavioural biases, the stylised effects thereof can be observed and investigated.

The chief ......................

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This article was published in Opalesque's New Managers a top-down monthly analysis, news and research publication on the global emerging manager space.
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