Reverse Engineering the Competition

So far we have seen that if you are prepared to accept volatile performance with large swings in a short amount of time, you can receive very strong long-term results as a reward. The volatility in some years may seem excessive to many people and some may be quick to rule these strategies as simply too risky to be practical. At the same time, we can also show that as volatile as trend-following futures trading can be, you are likely to get even higher volatility if you just buy and hold equities and that alternative gives you significantly lower returns. I am sure there are readers who are a little sceptical at this point, wondering whether you can run such a rocket ship of a strategy in real life and whether it is plausible that the large futures hedge funds are doing these things. Surely they must be doing something tremendously more complex, given their massive research budgets and enormous profitability?

The short answer to that is: not really. Most of them do what I describe in this book, with only minor variations. By this I don’t mean that they are using the exact rules I present or that they trade only one simple model in this manner. The point is that their returns can be replicated quite closely by using the model from this book. Any variations, tweaks and combinations of models that they may be using are not enough to differentiate them significantly from simple trend-following models such as our core strategy. There are not a whole ...

Get Following the Trend: Diversified Managed Futures Trading now with the O’Reilly learning platform.

O’Reilly members experience live online training, plus books, videos, and digital content from nearly 200 publishers.