John J Hardy
Saxo Bank’s head of FX strategy John Hardy takes a closer look at trends and moves in today’s forex charts, including EURUSD, USDJPY, AUDUSD, and EURSEK.
Article / 08 June 2015 at 9:12 GMT

Did trend following just die again?

Chief Investment Officer / ACIES Asset Management
  • Many trend following futures funds took a beating on the sudden bonds' reversal
  • Recurrent rumors of trend following's demise are greatly exaggerated
  • It is important to remember some trading rules when trend following 
By Andreas Clenow

In the past couple of months, many trend following futures funds took a beating on the sudden reversal in bonds. This has lead to the predictable speculations that trend following is dead as a strategy. Again. 

Trend following has been declared dead more times than Mark Twain. And much like in his case, the rumors of trend following's demise are greatly exaggerated. Let's take a look at some classic trend following models and see how they have performed lately.

A great trend following benchmark is the good old 12 months momentum model. The trading rules for this approach couldn't be much simpler:

  • Check signals once a week.
  • If yesterday's price is higher than the price was a year ago, be long.
  • If lower, be short.
  • Simple vola parity position sizing.
  • Run on broad set of cross asset class futures markets.

12 Months Momentum vs S&P 500 Total Return

Source: Original research, ThomsonReuters

While this model has a little blip by the end, it hardly shows a disaster. The period from 2011 to 2014 was a little concerning of course, but trend following came back in a big way after that.

So what about the simple trend model in my 2013 book? The trading rules were:

  • Only buy in bull market, only short in bear market. Measure trend with a dual 50/100 EMA.
  • Buy 50 day highs in bull market, short 50 day lows in bear markets.
  • Trailing stop of 3 times normal daily move (3xATR).
  • Run on broad set of cross asset futures markets.

Following the Trend Model vs S&P 500 Total Return

Source: Original research, ThomsonReuters

Here we see a very similar return pattern. No surprises of course. Trend following can't be done that many different ways. The return curve should look very similar. 

Neither of these approaches show any real setback for trend followers. So why did we see so many trend following funds taking large losses in the past two months? 

The only asset class that had sizable losses for trend followers was bonds. This leads to the obvious conclusion that the funds that took the largest losses in the past couple of months were overly exposed to this sector. Of course, bonds did extremely well in the past year and the same funds may have seen significant gains during that period, so it swings both ways.

The learning lesson however should be very clear. Diversification is the key to long term trend following. Any single asset class can suddenly turn on a dime and go from high profitability to loss leader. Only by properly diversifying and trading all asset class, equities, bonds, agriculture, metals, energies, rates, forex, etc, can you achieve steady long term portfolio growth.

Trend following is very much alive, just as it has been for the past 40 years.

– Edited by Clemens Bomsdorf
Andreas F. Clenow is a hedge fund manager and principal at ACIES Asset Management. He is also the author of the best-selling book Following the Trend (Wiley 2012). Follow Andreas or post your comment below to engage with Saxo Bank's social trading platform.


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