Trend Following with Managed Futures

CHAPTER 7

Properties of Trend Following Returns

Trend following strategies are dynamic risk-taking strategies that profit from market divergence by systematically allocating capital across markets over a wide range of asset classes. Given their complementary approach to risk taking, a trend following approach can be a natural complement to many traditional investment strategies. To understand how trend following performs over time, this chapter discusses several key statistical properties of trend following returns. First, two divergence-focused performance measures, crisis alpha and crisis beta, which can be used to measure the complementary properties of trend following return are explained. Second, several key statistical properties of trend following returns are reviewed including total returns, crisis performance, correlation with equities, and skewness. These statistics represent different ways of understanding how trend following performs across time. A review of these statistics across pure trend following and other variants of trend following provides a view into how different approaches for system design can affect these statistical properties.

■ Trend Following as an Alternative Asset Class

A traditional asset is an economic resource, something that can be owned or maintain value. An asset class is defined as a group of securities or assets that have similar characteristics. An alternative asset class is defined as a set of assets outside the traditional asset classes ...