
Estimating the positioning of trend followers
There is a simple method of approximating trend follower positioning in real-time and without lag. It is based on normalized returns in liquid futures markets over plausible lookback windows, under consideration of a leverage constraint, and uses estimated assets under management as a scale factor. For optimization and out-of-sample analysis, the approach can be enhanced by sequential estimation of some key parameters, such as the momentum lookback, the normalized momentum cap and the lookback for realized volatility calculation. Trend follower positions are an important factor of endogenous market risk due to the size of assets under management in dedicated funds and the informal use of trend rules across many trading accounts.