Return Chasing and Trend Following: Superficial Similarities Mask Fundamental Differences
12 Pages Posted: 21 Jan 2016 Last revised: 30 Jan 2016
Date Written: January 29, 2016
Return chasing is often cited as one of the primary behavioral foibles of investors, resulting in sub-par returns. Surprisingly, the literature does not provide a generally accepted and testable description of return chasing. This paper proposes a simple definition. It then describes how return chasing so defined differs from trend following and how return chasing explains the shortfall of the returns of active, market timing investors compared to static asset allocation strategies. Finally, it shows that if the trading flows of return chasers are large enough to impact prices, then return chasing provides a powerful explanation of the positive returns earned by trend following strategies, which alternative descriptions of return chasing, such as it is trend following but with too long of a horizon, do not provide.
Keywords: Momentum, Trend Following, Return Chasing, Investor Sentiment, Asset Allocation, Tactical Asset Allocation, GTAA, Market Anomalies, Capital Flows, Fund Flows, Price Pressure, Price Impact, Return Predictability, Behavioral Finance, Investor Returns, Fund Returns, Past Performance, Market Timing
JEL Classification: G11, G12, G14, G23, C10, C50, E00, C00, G00
Suggested Citation: Suggested Citation