Disadvantages and Pitfalls
Like other financial products, strategies that involve trading strategy indices have burnt the fingers of many a pension fund and small bank. The simplest argument against these strategies would be this: If the strategy is expected to be very profitable, the only eyes that it would catch would be the proprietary desks of these investment banks. For example, the fed funds curve strategy actually ends up being behind the curve as it takes action based on what the fed has already done – this implies that the steepening has already occurred. However, such argument can hold true for everything a bank is willing to trade. A more serious issue is the danger that past backtested performance is simply the result of data-snooping – especially when signals are plentiful and difficult to justify on economic grounds (e.g. moving averages crossing signals).
Read more about this topic: Trading Strategy Index
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