The Market Environment for Trendfollowing

December - 2019

The performance of managed futures, particularly trendfollowing strategies (“Trendfollowing”), has been mixed in recent years. Although returns in the industry have been strong year to date (September 2019), the performance this decade has been weaker than in previous decades and has prompted many investors to ask whether something structurally has changed.*

Several theories have been put forward by industry commentators and investors to explain the lower performance such as:

  • “There is too much money in the space”
  • “Trendfollowers are being front-run or gamed by other market participants”
  • “Markets have become faster and Trendfollowers are too slow to react”.

In this paper we assess these theories, evaluate the market environment for Trendfollowing and consider the outlook for the strategy. Our conclusion is that the market environment, characterised by fewer large moves, more reversion and fewer sustained trends, is the primary explanation for lower performance in the last decade. In our opinion, an unusually benign macroeconomic backdrop coupled with extraordinary monetary stimulus may have contributed to fewer major trends in markets. Looking ahead we see several potential scenarios which may support a more favourable environment for Trendfollowing.

* Unless otherwise stated, the Barclay CTA Index is used to represent the managed futures industry for the purposes of the linked paper. A description of the Barclay CTA Index is included on page 22 of the paper. Past results are not indicative of future results. Trading in managed futures is not suitable for all investors given its speculative nature and the high level of risk involved including the risk of total loss of initial investment.

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