China Aviation: Another Barings Bank Won by Trend Followers?

People wonder how trend followers can continue to win. They incorrectly assume that everyone in the market trades the same way, thus limiting a trend follower’s ability to make money.

China Aviation (like the scandals of LTCM, Barings and Enron profiled in the book Trend Following) is the latest example of bad trading strategy. It is apparent from the following three articles that China Aviation had some serious problems in regards to their trading strategy:

Senior Dealing Director at Phillip Securities’, Gabriel Yap, gave this example:

They had bet that oil price would go down, so they would make money on the short. Instead, they lost heavily on the short. Then they probably took a double long position, to cover up the short position, and try to make up for the losses they had made on the short position… It’s quite likely the sudden fall in oil prices, from 55 dollars to 42 in just a week, hammered them very badly.

And shockingly (that is a joke), it appears some large brand name banks had exposure in this latest mess.