Trend Following with Managed Futures

CHAPTER 10

Trend Following in Various Macroeconomic Environments

Trend following strategies perform well during periods of market divergence. Underlying macroenvironmental factors can drive market divergence creating tradable price momentum. In this chapter, several key macro aspects of markets are discussed: interest rate environments, postcrisis recovery in a period of quantitative easing, government interventions, and regulatory forces. The results across macro environments are mixed and often highly idiosyncratic. As a caveat, this chapter provides a summary of different perspectives on macro effects and market interventions. The analysis is qualitative, historical, and in some cases anecdotal. In addition to discussion of macro events, this chapter provides an analysis of the recent strong equity bull markets following the credit crisis, a period of quantitative easing. In general, the question of macro-wide effects and the link between these effects and trend following is complex. There are still many open questions that are left for future research.

■ Interest Rate Environments

Returning to the historical study of trend following in the introduction of this book, return data for a set of stock index, bond, and commodity markets going back as far as 1693 can be used to examine macro environments from a longer term perspective. Figure 10.1 illustrates the cumulative performance of a simple trend following system over the roughly 300-year period.¹ The Sharpe ratio for ...