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This study investigates whether the global latent factor estimated using the three‐pass regression filter (TPRF) contains useful information for the development of a long‐short strategy for international index futures returns. Our results show that the long‐short portfolio strategy based on the TPRF forecast can provide higher excess profits than other competing approaches. We also find that the results remain unchanged within good and bad market conditions, the performance of the long‐short portfolio being better in bad market conditions than in good market conditions. Finally, the results remain unchanged even when the transaction costs are considered in the long‐short portfolio strategy based on the TPRF forecast.

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