Trend-following strategies have gone through a significant drawdown recently and delivered lower returns in the current decade compared to their multi-decade history. 2 2 Close As evidenced by the SG Trend Index and the hypothetical trend-following strategy described herein. Please read performance disclosures in the Disclaimers for a description of the investment universe and the allocation methodology used to construct the trend-following strategy. Hypothetical data has inherent limitations, some of which are disclosed in the Disclaimers. Managed futures investors are naturally wondering if something has changed and whether the strategy can deliver better returns going forward. We developed a novel framework to understand what drives trend-following returns and examine various possible explanations for why trend following has struggled since the Global Financial Crisis. Our findings suggest that the lower returns in the current decade are due to fewer large moves across markets over this time period, as opposed to a decline in the strategy’s ability to profit from trends. As a result, we believe trend-following strategies may see higher returns if markets exhibit similarly sized moves relative to their long-term history going forward. 3 3 Close There is no guarantee that this strategy will be successful. There is a potential for loss. For illustrative purposes only and not representative of any strategy that AQR currently manages. Past performance is not a guarantee of future performance.
- We present a novel empirical framework to attribute the impact of various drivers of trend-following performance.
- The lower performance of the strategy in the current decade is not explained by an inability for trend following to translate trends into profits or a lack of diversification across global markets.
- Instead, the average size of market moves across global markets has been more muted than usual in the current decade and is the primary explanatory factor for recent trend performance.
- There is little evidence to suggest this is a permanent structural change for markets, providing hope that trend-following strategies should be able to deliver performance more in line with long-term expectations going forward.
The information contained herein is only as current as of the date indicated, and may be superseded by subsequent market events or for other reasons. The views and opinions expressed herein are those of the author and do not necessarily reflect the views of AQR Capital Management, LLC, its affiliates or its employees. This information is not intended to, and does not relate specifically to any investment strategy or product that AQR offers. It is being provided merely to provide a framework to assist in the implementation of an investor’s own analysis and an investor’s own view on the topic discussed herein. Past performance is not a guarantee of future results.