CHAPTER 14
Portfolio Perspectives on Trend Following
Up until this point, trend following has been examined somewhat in isolation. The remainder of this book turns to trend following from a more global perspective. This chapter reviews three core issues that represent advanced topics: the role of equity markets and crisis alpha, understanding cyclicality in trend following volatility, and the role of mark-to-market for manager-to-manager correlations. This chapter opens the discussion of trend following from an investor perspective. Chapter 15 discusses the role of size, liquidity, and capacity. Chapter 16 examines the act of diversifying away from pure trend following. Chapter 17 discusses dynamic allocation to trend following across time.
■ A Closer Look at Crisis Alpha
Chapter 4 introduced the concept of crisis alpha in the context of adaptive markets. Throughout the following chapters the importance of crisis alpha is discussed using an array of measures and across construction styles for trend following. For an institutional investor, crisis alpha is a key characteristic for understanding how trend following strategies can perform during difficult periods for traditional portfolios. Chapter 7 discussed how crisis alpha can be applied for different asset classes. This section focuses on diving deeper into how equity markets relate to crisis alpha.
Equity Dependence
A typical trend following portfolio consists of seven sectors: equity indices, bonds, short-term interest ...
