You Can't Always Trend When You Want
27 Pages Posted: 1 Dec 2019
Date Written: September 1, 2019
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: Suggested Citation