Momentum strategies exploit a persistent market anomaly where past returns of a price series are positively correlated with future returns. A price series which was in an uptrend in the past tends to continue being in an uptrend in the future.
Futures exhibit serial correlation because of the roll return component of the total return. The sign of roll returns does not vary very often. Futures stay in contango or backwardation over long periods of time. Spot returns vary very rapidly in sign and magnitude. If a future is held for long period and if average roll returns dominate average total returns, serial correlation of total returns is found.
The TU 2 year US Treasury note feature exhibits momentum. Initially, correlations are run for different time frames and holding days. The optimal lookback and holding days combination is selected and a momentum strategy is structure where the investor s buys (sells) future if it has positive (negative) 12-month return, and holds position for 1 month.
Since time series momentum of futures is due to persistence of signs of roll returns, the lagged roll return is used by the strategy and it goes long when return higher than threshold and short when return is negative than threshold and exit any existing position otherwise.
This strategy is applicable to other futures as well.