Following the Trend, 2nd Edition

CHAPTER 14Final Words of Caution

This book deals in highly leveraged derivatives strategies and, as such, it is wise to dedicate the final chapter to the risks and problems that may arise.

Diminishing Returns of Futures Funds

The trend‐following business used to be much easier and it is getting tougher and tougher to achieve the big number returns. In the 1980s and 1990s, most managers in this business had stellar compound returns with hardly any lasting drawdowns, but those days seem to have been replaced with higher volatility and more uncertain results. The core trend‐following strategies are still profitable, given enough time, but the return profiles have changed somewhat in the past decades.

It's hard to find indexes which accurately reflect the trend‐following industry, but one of the most widely followed is the Société Générale Trend Following Index. Figure 14.1 shows this index at the top, and five‐year rolling returns at the bottom. This is to show you the long‐term profile and how it changes over time.

What you see there is that the five‐year rolling returns used to be quite high and then kept falling, consistently, year after year. Just a year or two ago, you could have simply extrapolated this falling trend, pun very much intended, and claimed that trend following would become a negative sum game. But then we had that bottoming out of the returns back in 2020 ...