Trend Following, 5th Edition

21 Trend Following

Quality, Not Quantity

Anthony Todd and Martin Lueck

Aspect Capital

Overview

Investors typically seek to exploit the power of diversification: It is possible to improve risk-adjusted returns simply by combining different diversifying strategies of similar risk and return. In this paper, we ask if this approach should be applied to trend following models. There are many different methods of creating trend following models, and we consider a wide range of common approaches to investigate whether the combination of several of these models can lead to improved performance, or whether there is a better way to construct a trend following system.

We show how different trend following models, when applied to the same portfolio of markets and operated at similar speeds, generally have high correlations with each other and thus offer limited diversification benefits. We also demonstrate that a better approach to trend following is to apply a holistic methodology which aims to capture the most effective features of many different techniques and to integrate them in a single high-calibre model. We demonstrate that Aspect’s own trend following model, which has evolved over many years through innovative research that essentially combines the benefits of multiple different approaches, is such an example.

Introduction to Different Trend Following Models

In this paper we consider a group of 13 different trend following ­models. All the models have been applied to the same ...