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.