A good time for Trend Following … but, then again, it's always been!
Trend Following is one of the oldest strategies in the Hedge Fund industry and CTA returns are predominantly captured by a diversified Trend Following (TF) approach applied to four liquid asset classes – equity indices, interest rates, FX and commodities. We have written extensively on the subject of TF over the past 20 years and made the point on many occasions that the strategy has robustly demonstrated itself to be statistically significant; that following trends is a behavioral trait and that as such trends in financial instruments become self-generating and self-fulfilling; and finally that the strategy is not easily “arbitraged away” by a crowded mass of investors.
The empirical strength of the effect generates a level of risk-adjusted returns that is similar to traditional benchmarks albeit with frequent underperformance and infrequent overperformance (a fat right tail) that makes it hard to “buy and hold” for institutional investors (perhaps with the exception of those occasions where performance accelerations occur in sync with market selloffs).
The past few years make us (continue to) believe that it should be held as a mainstay position in institutional portfolios as a diversifier (and hedge) to traditional benchmarks and we remain firmly entrenched in the camp of TF supporters.