Investing in the turn-of-the-year effect in the U.S. futures markets

Security markets have consistent patterns of a seasonal or fundamental nature that provide excess returns in relation to their risk and hence may violate the efficient market hypothesis. These so-called anomalies or statistical regularities occur because of increased cash flows, institutional constraints and policies, behavioral considerations, the timing of information, the slowness of markets to react to new information, the interaction of informed and uninformed traders with market makers, and window dressing by portfolio managers. The turn-of-the-year effect in which low capitalized small stocks outperform high capitalized big stocks is one of the most reliable. A good way to invest in this anomaly is to use a futures spread that is long in small stocks and short in big stocks. This strategy has low costs and is easy to implement. The author has successfully used this strategy with real money in his private mutual fund and in other accounts in the turns-of-the-years from 1983/1984 to 1993/1994, making profits in each of these 11 years.