Diversifying Trends

41 Pages Posted: 14 Feb 2020

See all articles by Charles Chevalier

Charles Chevalier

Université Paris Dauphine - Department of Finance; KeyQuant

Serge Darolles

Université Paris Dauphine - DRM-CEREG

Date Written: December 1, 2019


This paper provides a new method to disentangle the systematic component from the idiosyncratic part of the risk associated with trend following strategies. A simple statistical approach, combined with standard dimension reduction techniques, enables us to extract the common trending part in any asset price. We apply this methodology on a large set of futures, covering all the major asset classes, and extract a common risk factor, called CoTrend. We show that common trends are higher for some cross-asset class pairs than from intra-asset class ones, such as JPY/USD and Gold. This result helps to create sectors in a portfolio diversification context, especially for trend following strategies. In addition, the CoTrend factor helps to understand arbitrage-based hedge fund strategies, which by essence are decorrelated with the standard risk factors.

Keywords: Time series momentum, Portfolio construction, Factor analysis

JEL Classification: G11, G12, G15, F37

Suggested Citation

Chevalier, Charles and Chevalier, Charles and Darolles, Serge, Diversifying Trends (December 1, 2019). Université Paris-Dauphine Research Paper No. 3523001, Available at SSRN: https://ssrn.com/abstract=3523001 or http://dx.doi.org/10.2139/ssrn.3523001

Charles Chevalier (Contact Author)

Université Paris Dauphine - Department of Finance ( email )

Place du Maréchal de Lattre de Tassigny
Paris Cedex 16, 75775

KeyQuant ( email )

20 rue Quentin-Bauchart
Paris, 75008

Serge Darolles

Université Paris Dauphine - DRM-CEREG ( email )

place du Maréchal de Lattre de Tassigny
cedex 16
Paris, 75775

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