This PDF newsletter from Christian Baha, Superfund’s CEO, gives good perspective on the drawdowns of a trend following system.

Read the Christian Baha Drawdown Commentary (PDF)

Drawdowns are not a flaw in trend following. They are a structural feature of any approach that lets winning positions run and cuts losing ones short. The mathematics of the strategy guarantee that there will be extended periods where the system produces a series of small losses, waiting for the large trends that drive long-term performance. Christian Baha, who built Superfund into one of the most recognized systematic trading operations in Europe, understood this and communicated it directly to his investors.

The willingness to explain drawdowns honestly, rather than obscure them or apologize for them, is itself a marker of a serious systematic operator. Drawdowns are not failures. They are the expected cost of the approach. An investor who understands this can hold through the difficult periods that destroy the returns of traders who abandon the system at the worst possible moment, typically near the bottom of a drawdown, just before the large winning trades that justify the entire strategy arrive.

For a deeper look at how drawdowns work within a complete trend following system, how they are measured, what historical drawdown levels have looked like across systematic traders, and how position sizing controls the depth of drawdown, see the drawdown page. For the full story of how Superfund’s systematic approach was built and what it produced, see the Superfund trader profile.

Frequently Asked Questions

Who is Christian Baha?

Christian Baha is the founder and CEO of Superfund, one of Europe’s most prominent systematic trend following investment managers. He built the firm around a rules-based approach to trading global futures markets, applying trend following principles across a broad range of asset classes. His communication with investors about the realities of drawdowns in systematic trading is widely regarded as a model of transparency in the managed futures industry.

Why do trend following systems experience drawdowns?

Because the strategy produces many small losses while waiting for the large trends that drive long-term returns. Most breakout entries fail to develop into sustained trends, producing small losses. A minority develop into the large moves that generate returns large enough to more than offset all the small losses combined. The period between large winning trades is the drawdown. It is not evidence that the system is broken. It is the expected behavior of an approach built around cutting losses short and letting winners run.

Why is understanding drawdowns important for investors in trend following?

Because investors who do not understand drawdowns tend to exit the strategy at the worst possible time, typically near the bottom of a drawdown period, just before the large winning trades arrive. Baha’s newsletter addresses this directly by giving investors the perspective to hold through difficult periods rather than abandoning the approach when short-term results are uncomfortable. A system that works over time only delivers its long-term results to investors who stay in it long enough to capture them.

Trend Following Systems
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