You Can't Always Trend When You Want

27 Pages Posted: 1 Dec 2019

See all articles by Abhilash Babu

Abhilash Babu

AQR Capital Management, LLC

Brendan Hoffman

AQR Capital Management, LLC

Ari Levine

AQR Capital Management

Yao Hua Ooi

AQR Capital Management, LLC

Sarah Schroeder

affiliation not provided to SSRN

Erik Stamelos

AQR Capital Management, LLC

Date Written: September 1, 2019

Abstract

We present a novel framework to decompose the drivers of trend-following performance into (i) the magnitude of market moves, (ii) the strategy’s ability to profit from those market moves, and (iii) the degree of diversification across markets. This framework allows us to examine why trend performance has been below the strategy’s long-term average return during the current decade. We find that the lower performance of the strategy is neither explained by (ii) nor (iii): trend following has continued to profit from market moves and benefit from diversification. Instead, the primary explanatory factor is (i), namely that the average size of global market moves has been more muted than usual in the current decade. The fact that trend-following strategies continue to translate market moves into profits in a diversified manner suggests that trend-following investing may see stronger performance in market environments characterized by more pronounced movements in markets going forward.

Keywords: trend-following investing, momentum, managed futures, CTA

JEL Classification: G02, G1, G13, G14

Suggested Citation

Babu, Abhilash and Hoffman, Brendan and Levine, Ari and Ooi, Yao Hua and Schroeder, Sarah and Stamelos, Erik, You Can't Always Trend When You Want (September 1, 2019). Available at SSRN: https://ssrn.com/abstract=3487134 or http://dx.doi.org/10.2139/ssrn.3487134

Abhilash Babu

AQR Capital Management, LLC ( email )

Greenwich, CT
United States

Brendan Hoffman

AQR Capital Management, LLC ( email )

Greenwich, CT
United States

Ari Levine (Contact Author)

AQR Capital Management ( email )

Greenwich, CT
United States
2037423851 (Phone)

Yao Hua Ooi

AQR Capital Management, LLC ( email )

Greenwich, CT
United States

Sarah Schroeder

affiliation not provided to SSRN

Erik Stamelos

AQR Capital Management, LLC ( email )

Greenwich, CT
United States

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