Alternative Investing

You Can't Always Trend When You Want

1 1 Close
…but if you allocate, over time, you just might find… you get what you need!

Topics - Alternative Investing Trend Following

Read Time - 15 min

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You Can't Always Trend When You Want

Trend-following strategies have gone through a significant drawdown recently and delivered lower returns in the current decade compared to their multi-decade history. 2 2 Close As evidenced by the SG Trend Index and the hypothetical trend-following strategy described herein. Please read performance disclosures in the Disclaimers for a description of the investment universe and the allocation methodology used to construct the trend-following strategy. Hypothetical data has inherent limitations, some of which are disclosed in the Disclaimers.   Managed futures investors are naturally wondering if something has changed and whether the strategy can deliver better returns going forward. We developed a novel framework to understand what drives trend-following returns and examine various possible explanations for why trend following has struggled since the Global Financial Crisis. Our findings suggest that the lower returns in the current decade are due to fewer large moves across markets over this time period, as opposed to a decline in the strategy’s ability to profit from trends. As a result, we believe trend-following strategies may see higher returns if markets exhibit similarly sized moves relative to their long-term history going forward. 3 3 Close There is no guarantee that this strategy will be successful. There is a potential for loss. For illustrative purposes only and not representative of any strategy that AQR currently manages.  Past performance is not a guarantee of future performance.  

Key takeaways

  • We present a novel empirical framework to attribute the impact of various drivers of trend-following performance.
  • The lower performance of the strategy in the current decade is not explained by an inability for trend following to translate trends into profits or a lack of diversification across global markets.
  • Instead, the average size of market moves across global markets has been more muted than usual in the current decade and is the primary explanatory factor for recent trend performance.
  • There is little evidence to suggest this is a permanent structural change for markets, providing hope that trend-following strategies should be able to deliver performance more in line with long-term expectations going forward.

Published In

Journal of Portfolio Management

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.