The 1×1 of trend-following

July 2, 2016

Trend-following is the dominant alternative investment strategy. Its historical return profile has been attractive on its own and for diversification purposes. It is suitable for rising and falling prices, albeit not for range-bound and “gapping” markets. A basic trend-following algorithm is easy to build. Trend-following commands over USD300 billion in dedicated assets and a lot more are managed by informal trend-followers. The style is itself a major force of price trends, with no direct ties to fundamental asset value.

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Inefficient benchmarking and trading opportunities

March 25, 2016

Academic research explains how benchmarking induces investment managers to buy overvalued highly volatile assets. This makes markets inefficient and may even lead to a negative relation between risk and return. It also offers opportunities for investment strategies. First, value investors can exploit the market’s proclivity to overvalue high-beta and high-volatility assets. Second, momentum traders can exploit the flows of funds in the benchmarked industry.

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Rational informational herding

February 27, 2016

It can be rational for traders to buy with rising prices and sell with falling prices. In particular, this should be the case if traders possess private information suggesting that “something big” is coming and that prices may move significantly, even if direction is not certain (e.g. “make-or-break” situations). Experiments confirm such rational informational herding.

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Momentum trading and setback risk

December 19, 2015

An empirical study suggests that momentum trades yield positive returns but carry higher downside than upside market risk. This “beta asymmetry” appears to be a global phenomenon across asset classes.  It is consistent with the broader observation that popular trading strategies come at the price of setback risk related to the crowdedness of positions.

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On the success of trend following in equity and FX

May 30, 2015

Empirical analyses document the success of trend following strategies in global equity and FX markets over the past 30 years. Stylized trend following delivered higher risk-adjusted returns with smaller maximum drawdowns when compared with other conventional strategies. It also provided value as a hedging strategy.

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Combining fundamentals- and momentum-based equity strategies

August 30, 2014

A University of York paper suggests that equity strategies based on fundamentals and strategies based on momentum are complementary. Thus, relative momentum seems to be a useful overlay for earnings growth-oriented portfolios (probably detecting when high growth companies hit a snag). And trend following has historically reduced volatility and drawdowns of both value and growth strategies.

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Origins of financial market trends

July 27, 2014

A working paper explores sources of market price trends. It suggests that small trend changes in perceptions about “fundamentals” can set in motion a persistent adjustment in transacted prices. And even without any changes to “fundamentals” or “technicals” trends are plausible.

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Trend following in U.S. equities

January 8, 2014

Trend following is a systematic investment style that takes directional positions in accordance with the difference between the current price and a moving average. For longer moving averages most trend following strategies would have outperformed simple buy-and-hold and value-based strategies in U.S. equities for many decades. Moreover, the simplest rules have been the best: there has been no benefit in high-frequency trading, stop losses, and conventional complications.

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Risk premia strategies

September 24, 2013

Risk premia strategies can be defined as diversifiable investment styles with fundamental value and positive historic returns. Their main types are (i) absolute value and carry, (ii) momentum, and (iii) relative value. A Societe Generale research report argues that value generation of these styles may be more reliable than that of asset classes and more suitable for combination into diversified portfolios.

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On “institutional herding”

June 14, 2013

Herding denotes broad uniformity of buying and selling across investors. If the transactions of one institution encourage or reinforce those of another, escalatory dynamics, liquidity problems, and pricing inefficiencies ensue. A Federal Reserve paper (which I noticed belatedly) provides evidence of herding in the U.S. corporate credit market during the 2003-08 boom-bust experience, particularly during sell-offs. Bond herding seems to be stronger than equity herding. Subsequent to herding dynamics price reversals have been prevalent, consistent with the idea of temporary price distortions.

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Macrosynergy is a London based macroeconomic research and technology company whose founders have developed and employed macro quantamental investment strategies in liquid, tradable asset classes, across many markets and for a variety of different factors to generate competitive, uncorrelated investment returns for institutional investors for two decades. Our quantitative-fundamental (quantamental) computing system tracks a broad range of real-time macroeconomic trends in developed and emerging countries, transforming them into macro systematic quantamental investment strategies. In June 2020 Macrosynergy and J.P. Morgan started a collaboration to scale the quantamental system and to popularize tradable economics across financial markets.

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