Why Did Trend-Following Underperform in the Last Decade?

Articles From: Quantpedia
Website: Quantpedia


Trend-following funds and strategies were once extremely popular after the 2008/2009 crisis. They offered attractive performance, and diversification properties made them a nice addition to investor’s portfolios. Ten years later, “trend-following strategy” is not such a popular word. Strategies didn’t blow-up, but their performance was far from spectacular. What are the main reasons for that? Is it an increased correlation among markets? Are trend rules inefficient? An important recent academic study written by Babu, Hoffman, Levine, Ooi, Schroeder, and Stamelos (all from AQR Capital Management) analyzes trend-following performance for each decade in the last 140 years and uses three distinct factors: the magnitude of market moves, the efficacy of trend-following strategies at capturing profitability from market moves, and the degree of diversification across trends in a trend-following portfolio. They show that it’s the first factor (a lack of large risk-adjusted market moves, positive or negative) that had the biggest impact in the last decade.

Authors: Babu, Hoffman, Levine, Ooi, Schroeder, and Stamelos

Title: You Can’t Always Trend When You Want


Notable quotations from the academic research paper:

“Our approach builds on the trend-following strategy as defined in Hurst et al. (2013, 2017) and uses data from the late 1800s through 2018. The markets considered include: 29 commodities, 11 equity indices, 15 bond markets, and 12 currency pairs. For each of the markets described above we construct 1-month, 3-month and 12-month time series momentum signals. The three signals are then equally weighted. Positions are sized according to their expected volatilities and then scaled in aggregate such that the portfolio maintains a 10% ex-ante annualized volatility target.

Exhibits 1 and 2 show there is a clear historical positive relationship between the absolute magnitude of moves in individual markets and the risk-adjusted returns of a hypothetical trend-following strategy.


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