Risk Approach to Valuing Trend Following Strategies

“[a paper]…written by William Fung and David Hsieh entitled “A Risk Approach to Valuing Trend Following Strategies” has turned the belief that trend following is a reliably profitable strategy into certain knowledge. The study offers an absolute benchmark solution to the problem of valuing trend followers’ returns…

Defining a trend is like defining love. We know it when we see it, but we are rarely sure exactly what it is. Fung and Hsieh’s paper goes a long way to doing for trends what poets have been trying to do for love since time immemorial. They give us a working model that quantitatively defines their value for us. Traders will not be surprised to learn that trend following advisors performed best during extreme market moves, especially during bad months for equities. They will probably already know what the paper confirms: that crude oil, silver and wheat trend well, and so do currencies, especially Japanese yen and Swiss francs, and interest rate contracts, especially the German bund.”
Managed Account Reports, Inc.

Download paper.

Skeptics Abound

While Fung and Hsieh lay out the academic proof, skeptics of trend following circle like vultures. Take this Fund-of-Funds Manager for example:

My biggest source of hesitancy about the asset class is its reliance on technical analysis. Trading advisors do seem to profit, but since they rarely incorporate economic data, they simply ride price trends until they reverse. The end result of this crude approach is a subpar return to risk ratio.

TurtleTrader comment: One of the best misguided comments seen from a fundamentalist. He acknowledges the profitability of Trend Following, but argues it could be better if economic analysis was added. This manager would be better off learning why trend following works so well, instead of trying to mess it up with useless fundamental analysis.

Why should I give money to a AA baseball player when I can hire someone in the major leagues?

TurtleTrader comment: Trend following performance numbers speak the truth. If this is minor league performance…we think most people will take it!

Trend Following Products

Review trend following systems and training:

Michael Covel Trend Following Products
Michael Covel Trend Following Products

More info here.