Trend-following is a set of systematic, medium term strategies (weeks or longer holding period) which trade usually in liquid futures markets and were popular in the 70s and 80s. These funds are regulated by the CFTC (Commodity Futures Trading Commission) and follow a different set of rules regarding disclosure, fees etc.. In fact, performance tables and other details for most ctas are public info at http://www.iasg.com/ (free registration).
In essence, trend-following is almost antithetical to traditional ben-graham value-investing. It buys high, sells higher, shorts low, covers lower. Typically, there is no attempt to "value" assets - it merely judges whether a trend is valid and seeks to ride it until the trend exhausts itself:
(source: http://www.tradingopinions.com/wp-content/uploads/2012/11/trend_followers.jpg)
This is of course a highly simplistic description; nonetheless it captures the fundamental beliefs in trend-following which have resulted in outsized returns:
(Source: http://trendfollowing.com/images/comp1.jpg)
This is not an endorsement by any means - like any other strategy group the winners could have just been lucky just as much as there is a successful "school" a la Graham and Doddsville. Such strategies continue to evolve and some, such as Jerry Parker of Chesapeake Capital continue to manage hundred-million-dollar funds successfully.
(icon source: http://www.fxstreet.com/education/learning-center/unit-3/chapter-4/tren…)
Simple and Effective. This usually is not "investing"; but "trading".
Quotations because everyone has different definitions of the terms. Its also way the hell easier than picking tops and bottoms; which no one can do - don't be fooled.
I specifically address the use of the terms "trading" and "investing" in my best-seller. I'm pleased to provide a complimentary link to the relevant chapter here: http://bit.ly/utWsNy Also, in these two chapters I discuss trend following and futures trading: http://bit.ly/wX2ONc http://bit.ly/w70k8w
Many trend following fundies are in the short JPY trade. Difficult to find a good nice trend these days, mostly just choppy range trading.
Great to finally find someone else on WSO discussing systematic trading strategies. tt1254, do you run a CTA?
CTAs have been having a rough period due to choppy markets, but expect a strong January performance for most TF funds.
Not a cta myself, but have a trend-following bias (non systematic though) through equities. I did explore/research into such systematic strategies (e.g. buy at 52 week highs etc. , 50/200 crossovers) with little personal success. Like you say, these guys get cut up in choppy markets and can have 50%+ drawdowns (which can be disconcerting!).
On the other hand, those 50% drawdowns usually precede +100% runs, so can be a question of leverage. Bigger/well-known ones such as Winton Capital Management, are able to blend decent returns with far lower drawdowns http://www.iasg.com/groups/group/winton-capital-management/program/dive…
They also did well with inflation, so if true 5%+ inflation does actually appear, would expect trend followers to make a killing like in the 70s-80s esp in soft ags/gold etc.
Admittedly, I'm not a particular fan of TF on equities as I'm yet to find any meaningful results beyond certain momentum asset allocation models, but you may find this insightful in case you haven't already seen it: http://www.trendfollowing.com/whitepaper/Does_trendfollowing_work_on_st…
thanks for the link, I remember hearing of it before and is indeed an interesting starting point. Individual equities do have specific risks (easier to buy than short, borrow costs, stock-specific gaps/earnings/corporate events) do add some extra issues, but perhaps more opportunities as well!
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