Trend Following with Managed Futures

CHAPTER 16

Diversifying the Diversifier

Diversification is the act of introducing variety into an investment portfolio. Diversification is often touted as the only method to achieve some protection during periods of distress. For an investment manager, diversification can be either intrastrategy or interstrategy. For example, Chapter 15 discussed how fund size can impact intrastrategy diversification by limiting access to smaller, less liquid markets as well as examining statistics that affect interstrategy diversification benefits at the total portfolio level. This chapter focuses on diversification at an interstrategy or total portfolio level and discusses the prospect of moving from pure trend following into a more multistrategy approach. The empirical analysis in this chapter demonstrates that, on a stand-alone basis, a multistrategy approach may be beneficial to a trend following manager. Despite this, from an outside perspective, diversifying away from trend following may decrease some of the desirable properties in a larger portfolio context. More explicitly, the move from pure trend following to multistrategy results in reducing both the positive skewness and the potential for delivering crisis alpha. To demonstrate this more explicitly, portfolio benefits of a pure trend following program versus a multistrategy approach are compared empirically from the perspective of an institutional investor. From the perspective of the manager, a multistrategy approach may be desirable, ...