Stocks and Trend Following

Some people argue trend following is not for stocks. Jerry Parker offers insight (excerpts from Managed Account Reports):

I think another mistake we made was defining ourselves as managed futures, where we immediately limit our universe. Is our expertise in that, or is our expertise in systematic trend following, or model development. So maybe we trend follow with Chinese porcelain. Maybe we trend follow with gold and silver, or stock futures, or whatever the client needs. It’s called managed futures because that was the profit center at the FCMs. We’re trading these great systems, and testing, and making sure what we do has worked in the past. And being disciplined, and unemotional, and applying our methods to the futures markets. But limiting our trading to this one group of markets. We need to look at the investment world globally and communicate our expertise of systematic trading. You have Big Blue beating the world chess champion, and everybody saying yeah, that makes sense, I can understand that. We’ve not been able to maximize our opportunities with systematic trading. People look at systematic and computerized trading with too much skepticism. But a day will come when people will see that systematic trend following is one of the best ways to limit risk, and create a portfolio that has some reasonable expectation of making money. We’ve got to be there and ready to take advantage of the opportunity. I think we’ve miscommunicated to our clients what our expertise really is. Systematic trading is going to be better for everyone in the long run. Our methods will work on lots of different markets. The ones that are hot today, the ones that are not hot today. We don’t want to pigeon-hole ourselves as managed futures or commodities.

Some people argue trend following is dead. Burt Kozloff refutes the notion (excerpt from Managed Account Reports):

Are we now to believe that we have reached a state of equilibrium, in which supply and demand are more or less fitted, and markets will no longer trend? Will the economic expansion of the past years continue uninterrupted into the new millennium, ushering in a paradise of plenty? In February 1985, on a tour of Germany sponsored by the Deutsche Terminborse, several advisors and pool operators were making a presentation to a group of German institutional investors. Among them were two trend-based traders, Campbell & Co and John W. Henry & Co. During the question-and-answer period, one man stood and proclaimed: But isn’t it true that trend-following is dead? And that these methodologies have been completely discredited? And that a new breed of trader — one who does not need trends to profit — has arisen? And I am one of these new breeds… At this point, the moderator asked that slides displaying the performance histories for Campbell and Henry be displayed again. The moderator marched through the declines, saying: Here’s the first obituary for trend-based trading. Here’s the next one…and the next…but these traders today are at new highs, and they consistently decline to honor the tombstones that skeptics keep erecting every time there’s a losing period. Today, the new breed of trader character has long since vanished from the scene — now, perhaps, selling hedge funds — and Campbell and JWH have made their investors hundreds of millions of dollars since that time. It might, therefore, be a mistake to write yet another series of obituaries.

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