Protecting the Downside of Trend When It's Not Your Friend
The Journal of Portfolio Management (2019), https://doi.org/10.3905/jpm.2019.1.087
Posted: 23 Jul 2019
Date Written: July 16, 2019
Simple trend-following strategies have been documented as cost-effective, transparent alternatives to the hedge-fund style Managed Futures strategies. While largely capturing the returns of the Managed Futures industry, those simple strategies may periodically suffer significant losses due to over-simplified trend signals and under-diversified portfolio construction. In this article, the authors show that trend-following strategies with moderate sophistication and better diversification can significantly reduce the downside risk of simple trend-following strategies without sacrificing much upside potential. The authors therefore recommend investors who seek the benefits of cost-effective trend-following strategies to consider adding reasonable complexity to the strategies.
Keywords: trend-following, Managed Futures, CTA, hedge funds, portfolio construction, risk management
JEL Classification: G02, G11, G12, G13, G14, G23
Suggested Citation: Suggested Citation