AQR White Paper
Given the current low yields in global bond markets and the possibility of a rising rate environment going forward, two questions regarding trend-following strategies are often asked. First, can trend followers benefit from the uncertain impacts of rising yields on asset class returns? Second, if trend followers get short fixed income, will the strategy maintain its diversification properties?
This paper addresses those questions by examining the performance of a simple trend-following strategy during a historical period of secularly rising rates. The data demonstrates that trend followers would not have required declining rates to generate meaningful returns, and trend following’s attractive portfolio diversification properties would not be diminished during rising rate regimes.
The authors conclude that the data indicate that while trend followers may have generated a significant portion of their returns from bullish trends in fixed income markets during the past few decades, that doesn’t mean expected returns or diversification properties will necessarily worsen when rates begin to rise.
Generally, they add, an analysis of historical returns of trend following suggests that the strategy is designed to benefit when markets experience gradual and persistent changes in either direction.
The information contained herein is only as current as of the date indicated, and may be superseded by subsequent market events or for other reasons.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.