Alternative Investing
A Century of Evidence on Trend-Following Investing
November 1, 2017
Topics - Alternative Investing Trend Following
As an investment style, trend following has existed for a very long time. Some 200 years ago, the classical economist David Ricardo’s imperative to “cut short your losses” and “let your profits run on” suggests an attention to trends. Early in the last century, the legendary trader Jesse Livermore stated explicitly that the “big money was not in the individual fluctuations but in ... sizing up the entire market and its trend.”
The most basic trend-following strategy is time series momentum — going long markets with recent positive returns and shorting those with recent negative returns. Time series momentum has been profitable on average since 1985 for nearly all equity index futures, fixed income futures, commodity futures and currency forwards (Moskowitz, Ooi and Pedersen (2012)). The strategy explains the strong performance of managed futures funds from the late 1980s, when fund returns and index data first becomes available.
This paper seeks to establish whether the strong performance of trend following is a statistical fluke of the last few decades or a more robust phenomenon that exists over a wide range of economic conditions. Using historical data from a number of sources, we construct a time series momentum strategy back to 1880 and find that the strategy was consistently profitable over the next 110 years.
The data also provide context for evaluating a more recent period for the strategy. We consider the effect of increased assets in the strategy as well as the increased correlations across markets since the credit crisis. We also review a number of developments that are potentially favorable for the strategy going forward.
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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The information contained herein is only as current as of the date indicated, and may be superseded by subsequent market events or for other reasons.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.