Trend following is having a banner year so far in 2022, providing valuable diversification to investors who stuck with the strategy.
Trend following strategies have delivered exceptionally strong returns in 2022 and these returns have acted as a valuable source of diversification for investor portfolios. While it is true that the 2010s were a more difficult time for trend following strategies, we do believe that that decade was characterized by a time of unusually low macroeconomic volatility that made it more challenging for these strategies. In 2022, we have seen a shift to a more regular market environment, where we have seen larger market moves which has proven to be a more fertile environment for a trend following approach and we do believe that will likely persist going forward.
The 2010s featured a unique set of fundamental macroeconomic forces, including benign macroeconomic shocks, that created an unfavorable environment for persistent price trends.
The decade following the global financial crisis featured a set of global macroeconomic forces that created an unfavorable environment for price trends. What we saw in the 2010s was an unusual period of low macro volatility, the level of volatility that we saw in inflation and growth around major developing economies, was lower than normal and along with that we saw that the percentage of market moves that would be considered large in any year, were a lot lower than what we had seen historically. As a result of that, trend following, had a more difficult time profiting from persistent and large price trends in that particular decade.
Looking ahead, investors may expect persistent macroeconomic volatility and large market moves.
We think it is likely that the heightened level of macro volatility that we have observed in 2022 so far is likely to persist in the near term. The set of factors that have driven the higher degree of macro volatility and correspondingly the larger number of large market moves that have been profitable for trend following are unlikely to go away any time soon. Going forward, central banks have a difficult challenge in balancing their need to combat high inflation that has been persistent along with moderating potential growth shocks to the economy. And we think there is high potential for macroeconomic volatility going ahead.
A diversified approach to trend following may make the strategy easier for investors to stick with in the long-term.
We believe a more diversified approach to trend following that will help provide better average returns and even strong protective properties will make it easier for investors to stick with the strategy over the long term. Two of the important diversifying innovations are alternative market trends and economic trends. Alternative market trends apply a trend following approach to trade in markets that are less correlated, and less traded by traditional trend followers. On the other hand, economic trend signals focus on trends in the underlying macroeconomic data that cause market moves. We have high conviction that combining these different approaches will generate a more diversified approach to trend following that will cause it to be a good complement to portfolios and deliver a smoother ride even when markets are less favorable to traditional trend following strategies.
This document is not intended to, and does not relate specifically to any investment strategy or product that AQR offers. It is being provided merely to provide a framework to assist in the implementation of an investor’s own analysis and an investor’s own view on the topic discussed herein.
This document has been provided to you solely for information purposes and does not constitute an offer or solicitation of an offer or any advice or recommendation to purchase any securities or other financial instruments and may not be construed as such. The factual information set forth herein has been obtained or derived from sources believed by the author and AQR Capital Management, LLC (“AQR”) to be reliable but it is not necessarily all-inclusive and is not guaranteed as to its accuracy and is not to be regarded as a representation or warranty, express or implied, as to the information’s accuracy or completeness, nor should the attached information serve as the basis of any investment decision. This document is not to be reproduced or redistributed to any other person. The information set forth herein has been provided to you as secondary information and should not be the primary source for any investment or allocation decision. Past performance is not a guarantee of future performance. Diversification does not eliminate the risk of experiencing investment losses.
This material is not research and should not be treated as research. This paper does not represent valuation judgments with respect to any financial instrument, issuer, security or sector that may be described or referenced herein and does not represent a formal or official view of AQR. The views expressed reflect the current views as of the date hereof and neither the author nor AQR undertakes to advise you of any changes in the views expressed herein.
The information contained herein is only as current as of the date indicated, and may be superseded by subsequent market events or for other reasons. Charts and graphs provided herein are for illustrative purposes only. The information in this presentation has been developed internally and/or obtained from sources believed to be reliable; however, neither AQR nor the author guarantees the accuracy, adequacy or completeness of such information. Nothing contained herein constitutes investment, legal, tax or other advice nor is it to be relied on in making an investment or other decision. There can be no assurance that an investment strategy will be successful. Historic market trends are not reliable indicators of actual future market behavior or future performance of any particular investment which may differ materially, and should not be relied upon as such. Diversification does not eliminate the risk of experiencing investment losses.
The information in this paper may contain projections or other forward-looking statements regarding future events, targets, forecasts or expectations regarding the strategies described herein, and is only current as of the date indicated. There is no assurance that such events or targets will be achieved, and may be significantly different from that shown here. The information in this document, including statements concerning financial market trends, is based on current market conditions, which will fluctuate and may be superseded by subsequent market events or for other reasons.