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Man Institute – Trend Following

In this article, Man Institute reports that trend following strategies perform as well as equities in the long term, yet get there with lower risk, smaller drawdowns, and do best when equities are at their worst. What’s not to like about that?

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Key Takeways

PROS:

Since 1986, the inception of the index used in the article, trend-following has achieved the same return as stocks.
Historically trend-following has positive performance when risk assets are in times of crisis.
Blending stocks and trend-following meaningfully improves return/volatility ratio and return/drawdown ratio.

CONS:

Explaining the performance of a trend-following strategy is not very intuitive. For example, if stocks have positive performance for the quarter and trend-following has positive performance it does not necessarily mean trend-following made money by owning stocks. The positive returns in the trend-following strategy could have come from a variety of markets such as oil & gas or currency markets.
The return profile of trend-following is psychologically upsetting. Long periods of low returns are emotionally more difficult to handle than short periods of negative returns.

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