Trend-Following Investing as a Return Printer

Trend-following strategies demonstrated remarkable profitability last year, even amidst a challenging market downturn. These systematic approaches predominantly harness the power of managed futures across a broad spectrum of asset classes, seeking to exploit what could be perceived as inefficiencies within the market. One of the most well-known and basic trend-following methods, called Momentum, involves taking long positions in current outperforming assets and shorting those lagging behind.

This month, we focus on a piece of research¹ which aims to construct and quantify what could constitute a momentum-based portfolio using a time series momentum approach. The researchers have conducted extensive data analysis, enabling them to extend their examination all the way back to 1880. Their findings indicate that even after accounting for simulated fees and transaction costs, momentum appears to be a consistently profitable strategy across various asset classes and timeframes. Moreover, its low correlation with traditional asset classes such as US Equities and 10Y US Bonds serves as a valuable diversification tool. The study also demonstrates that augmenting a 60/40 portfolio with their low-beta yet high-gamma momentum strategy must enhance the risk-return profile.

As most investors seek returns and diversification in their portfolio, it is crucial to carefully consider trend-following strategies as a valuable and consistent building block in an all-weather allocation.

¹Hurst, B., Ooi, Y. H., & Pedersen, L. H. (2017). A century of Evidence on Trend-Following Investing. Social Science Research Network. https://doi.org/10.2139/ssrn.2993026

Benoit Lahaye
Junior Investment Analyst

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