May 1, 2019

AQR on Trend Not Being Dead, Yet

In this AQR document (You Can’t Always Trend When You Want, AQR, Spring 2019) they come to the conclusion that despite trend under-performance since 2009, something I have perseverated on here before, that their best guess is that the anomaly premium is not gone yet.  Now I have to admit they do have a pony or two in this trend circus but I trust them since they have been a forthright and deeply quantitative crew for a long time. Full disclosure: I own some AQR trend related assets.

Here are some take-aways that might affect my own decisions around whether I keep or sell. Again, maybe this is why they publish these kind of things, but I don't think so:
  • Our findings suggest that the lower returns in the current decade are due to fewer large moves across markets over this time period, as opposed to a decline in the strategy’s ability to profit from trends. 
  • …we believe trend-following strategies may see higher returns if markets exhibit similarly sized moves relative to their long-term history going forward. 
  • the average size of market moves across global markets has been more muted than usual in the current decade and is the primary explanatory factor for recent trend performance 
  • There is little evidence to suggest this is a permanent structural change for markets, providing hope that trend-following strategies should be able to deliver performance more in line with long-term expectations going forward. 
  • In other words, we find that market moves have been more muted on average in the years following the Global Financial Crisis, and there has not been a significant change to trend efficiency. Moreover, we see that trend following was still able to benefit from the large market moves that occurred during this period, notably in 2014, when the strategy performed well. 
  • we do not believe the nature of markets has changed permanently in recent years and expect the magnitude and frequency of market moves going forward to look more similar to the full historical period, rather than the unusual behavior of the current decade. 
  • Notably, the diversification multiplier for the hypothetical trend-following strategy has not been materially different in recent history than in the full sample. Hence, an unusual lack of diversification does not appear to explain trend following’s recent underperformance relative to history. 
  • we find that the main culprit behind trend following’s challenging performance in recent years is a lack of large risk-adjusted market moves (positive or negative), and not an inability for trend following to translate trends into profits or a lack of diversification. 
  • Looking ahead, while we cannot for certain say when markets will exhibit sustained large moves, we expect that they eventually will, and that trend-following strategies will be able to profit from them accordingly.
From the paper... Note that I did something vaguely and amateurishly similar to this chart here, near the end:


  1. But if you try sometimes, you just might find, you trend what you need