Larry Swedroe: Trend Following As Insurance

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willthrill81
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Re: Larry Swedroe: Trend Following As Insurance

Post by willthrill81 » Wed May 15, 2019 1:03 pm

garlandwhizzer wrote:
Wed May 15, 2019 12:28 pm
I have a practical application question for willthrill81 about his trend following strategy in action in the recent past. Please excuse me if you have answered this before, willthrill81, in some other post but I am curious. The market decline last fall climaxed on Christmas Eve with a 19+% drop in the S&P 500. I suspect but do not know for sure that such a decline initiated a sell of equity in your trend following strategy. I assume that your equity was in a tax-deferred account so taxes would not have been initiated by this move. If equity had been in a non-tax deferred account that move would have generated unanticipated taxes right at the end of the tax year, not a good thing. So I assume this trend following strategy is presumably for tax deferred accounts only for tax efficiency.
Yes, I got whipsawed by the last correction by about 10%. However, my strategy does not use price alone. While I don't have any taxable accounts, one could use futures options to effectively zero out one's long position in equities rather than sell for tax efficiency.
garlandwhizzer wrote:
Wed May 15, 2019 12:28 pm
The other question I have is about subsequent market action. Having sold equity at or near the bottom of that long decline, presumably you were not on board when the market suddenly skyrocketed back up, recovered all those loses, and even went on to new highs. Did your strategic rules for trend following allow you to take advantage of that rather quick and rather steep rebound? I realize that the market could have kept on dropping and turned into a severe bear market. Trend following protected you from that outcome but it seems that protection does not come free of charge. There was an opportunity cost relative to a buy and hold strategy in this case. That doesn't suggest that trend following is a bad strategy, just that like other strategies that protect from downside market volatility, it costs for that protection. Picking the right point to get back into the market after a decline can be tricky.

Market timing is difficult because it involves making two decisions well--when to sell out and when to buy back in. For most of us, it's hard enough to get one of these right, let alone both. Just curious, how well did your trend following parameters navigate this recent episode?

Garland Whizzer
My strategy only calls for me to take action no more than once per month.

I'm not saying that this is you, but many are under the mistaken belief that trend following is meant to protect against all market declines, but this is of course impossible. It is meant to protect against deep drawdowns, which it has historically done well compared to buy-and-hold.

Also, it's not quite correct to say that you have to make two correct decisions; trend following will not sell at the peak, nor will it buy at the bottom of the trough. In reality, you come out ahead of BAH if you buy back in at a lower price than you sold.

I'm not at all concerned about the recent whipsaw because I knew full well when I adopted my strategy that they would occur. It's like questioning BAH as a strategy when you experience a 30% drawdown in stocks. In both cases, we should be focused on long-term results. As Paul Merriman, who practices both trend following and BAH has said, "A year in the market is just noise."
“It's a dangerous business, Frodo, going out your door. You step onto the road, and if you don't keep your feet, there's no knowing where you might be swept off to.” J.R.R. Tolkien,The Lord of the Rings

abc132
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Re: Larry Swedroe: Trend Following As Insurance

Post by abc132 » Wed May 15, 2019 1:19 pm

Forester wrote:
Wed May 15, 2019 1:01 pm
I'd like to understand better why unemployment usually creeps up before the market turns south. Maybe in the future it will be different?

This market timing method seems too good to be true, but it is what it is. The temptation to make heavy use of it is there.
Wonderful! This is the type of question I hope to hear from Bogleheads.

There is a real debate about whether humans will need to work when machines can replace many/most of their jobs. The answer is unclear.

In the past, machines have replaced jobs, but humans have been able to find other employment. As machines can replace more skilled jobs (investment adviser, insurance agent, decision making), where are these new jobs going to come from, and how important will they be to a countries wealth?

Is it the labor of the US worker or the stability and multiplier of production/wealth from that labor that makes the US a great place to invest? What happens if/when the multiplier of production no longer depends on human labor, or weakly depends on human labor?

These are important things to think about when you make a strategy gated by unemployment rate.

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willthrill81
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Re: Larry Swedroe: Trend Following As Insurance

Post by willthrill81 » Wed May 15, 2019 1:24 pm

abc132 wrote:
Wed May 15, 2019 1:19 pm
Forester wrote:
Wed May 15, 2019 1:01 pm
I'd like to understand better why unemployment usually creeps up before the market turns south. Maybe in the future it will be different?

This market timing method seems too good to be true, but it is what it is. The temptation to make heavy use of it is there.
Wonderful! This is the type of question I hope to hear from Bogleheads.

There is a real debate about whether humans will need to work when machines can replace many/most of their jobs. The answer is unclear.

In the past, machines have replaced jobs, but humans have been able to find other employment. As machines can replace more skilled jobs (investment adviser, insurance agent, decision making), where are these new jobs going to come from, and how important will they be to a countries wealth?

Is it the labor of the US worker or the stability and multiplier of production/wealth from that labor that makes the US a great place to invest? What happens if/when the multiplier of production no longer depends on human labor, or weakly depends on human labor?

These are important things to think about when you make a strategy gated by unemployment rate.
Of course there are risks with any strategy, including buy-and-hold. What impact would substantial unemployment due to automation have on the stock market? What if it results in a decades long slump in prices? Is your strategy prepared to deal with that?
“It's a dangerous business, Frodo, going out your door. You step onto the road, and if you don't keep your feet, there's no knowing where you might be swept off to.” J.R.R. Tolkien,The Lord of the Rings

le_sacre
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Re: Larry Swedroe: Trend Following As Insurance

Post by le_sacre » Wed May 15, 2019 1:30 pm

I'm afraid I didn't read the whole thread, but skimming through it looks like no one has mentioned this sort of news coverage:

https://www.investmentnews.com/article/ ... is-failing

Quantitative hedge funds used to do very well by offering a trend-following strategy, but they have recently moved away from it as an industry. In my opinion, this is not a reactionary move because of recent underperformance, but a loss of confidence (among very smart people who made buckets of money this way for decades) that this algorithmic strategy has survived into the current epoch of markets. Behavioral strategies that used to work great by betting on the aggregate behavior of crowds of human investors can fail when more and more trading is done by machines, at high frequency, and in a world with qualitatively greater availability, density, and speed of information.

abc132
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Re: Larry Swedroe: Trend Following As Insurance

Post by abc132 » Wed May 15, 2019 1:31 pm

willthrill81 wrote:
Wed May 15, 2019 1:24 pm
abc132 wrote:
Wed May 15, 2019 1:19 pm
Forester wrote:
Wed May 15, 2019 1:01 pm
I'd like to understand better why unemployment usually creeps up before the market turns south. Maybe in the future it will be different?

This market timing method seems too good to be true, but it is what it is. The temptation to make heavy use of it is there.
Wonderful! This is the type of question I hope to hear from Bogleheads.

There is a real debate about whether humans will need to work when machines can replace many/most of their jobs. The answer is unclear.

In the past, machines have replaced jobs, but humans have been able to find other employment. As machines can replace more skilled jobs (investment adviser, insurance agent, decision making), where are these new jobs going to come from, and how important will they be to a countries wealth?

Is it the labor of the US worker or the stability and multiplier of production/wealth from that labor that makes the US a great place to invest? What happens if/when the multiplier of production no longer depends on human labor, or weakly depends on human labor?

These are important things to think about when you make a strategy gated by unemployment rate.
Of course there are risks with any strategy, including buy-and-hold. What impact would substantial unemployment due to automation have on the stock market? What if it results in a decades long slump in prices? Is your strategy prepared to deal with that?
Are you willing to talk about the risks of the strategy of the post (trend following)?

This seems like the appropriate and actionable place to do so.

abc132
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Re: Larry Swedroe: Trend Following As Insurance

Post by abc132 » Wed May 15, 2019 1:36 pm

le_sacre wrote:
Wed May 15, 2019 1:30 pm
I'm afraid I didn't read the whole thread, but skimming through it looks like no one has mentioned this sort of news coverage:

https://www.investmentnews.com/article/ ... is-failing

Quantitative hedge funds used to do very well by offering a trend-following strategy, but they have recently moved away from it as an industry. In my opinion, this is not a reactionary move because of recent underperformance, but a loss of confidence (among very smart people who made buckets of money this way for decades) that this algorithmic strategy has survived into the current epoch of markets. Behavioral strategies that used to work great by betting on the aggregate behavior of crowds of human investors can fail when more and more trading is done by machines, at high frequency, and in a world with qualitatively greater availability, density, and speed of information.
A great example of the concerns/realization/rationalization that the future may not look like the past.

Thank you!

abc132
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Re: Larry Swedroe: Trend Following As Insurance

Post by abc132 » Wed May 15, 2019 1:57 pm

Forester wrote:
Wed May 15, 2019 1:01 pm
I'd like to understand better why unemployment usually creeps up before the market turns south. Maybe in the future it will be different?

This market timing method seems too good to be true, but it is what it is. The temptation to make heavy use of it is there.
When companies perceive grayer skies ahead, they attempt to reduce their biggest expenses (employees). A society depending on human wages to support its production will thus be both producing less product in anticipation of less purchases, which is linked to the need for less workers.

You have to be able to imagine a society where production is less linked to employment:

Let's say this is the case and in 2044 and it is a very hot or cold year. This change would likely spur the production of more/new products that were not just sitting on a shelf. No/few new employees would be needed to meet this capacity, but the production of a country would be tied to their ability to quickly and efficiently adapt to needed products. Innovation and finding new markets, combined with the machine multiplier would contribute to a countries wealth, in addition to their stability as a country. The stability and happiness of a country may also become key factors, as social unrest is a possible result of machines replacing human jobs.

When the solution to higher demand for products is no longer hiring extra workers, the unemployment rate may become a poor indicator for future stock performance.

Stock ownership is supposed to capture the future capacity of a company to produce or generate products and income, not their capacity to employ humans.

BJJ_GUY
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Re: Larry Swedroe: Trend Following As Insurance

Post by BJJ_GUY » Wed May 15, 2019 2:35 pm

Using economic data as an input variable may be useful as an investment indicator (I'm not debating it either way). I could be wrong here, but seems like methods that mimic systematic trading strategies are being described in this thread, but referred to as trend-following. I believe trend-following to be based purely on market/securities pricing data. Quant strategies, broadly, implement data such as fundamental/valuation, economic, technical, and of course various forms of alternative data (scraping, satellite images, and on and on).

For the person asking for trend-following risks to be explained... first, it's probably important for everyone to agree on terminology. Second, I actually have no idea what you are looking for when referring to what risk is added with trend-following. Can you be a bit more specific as to what you are asking about?

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Re: Larry Swedroe: Trend Following As Insurance

Post by willthrill81 » Wed May 15, 2019 2:56 pm

abc132 wrote:
Wed May 15, 2019 1:31 pm
willthrill81 wrote:
Wed May 15, 2019 1:24 pm
abc132 wrote:
Wed May 15, 2019 1:19 pm
Forester wrote:
Wed May 15, 2019 1:01 pm
I'd like to understand better why unemployment usually creeps up before the market turns south. Maybe in the future it will be different?

This market timing method seems too good to be true, but it is what it is. The temptation to make heavy use of it is there.
Wonderful! This is the type of question I hope to hear from Bogleheads.

There is a real debate about whether humans will need to work when machines can replace many/most of their jobs. The answer is unclear.

In the past, machines have replaced jobs, but humans have been able to find other employment. As machines can replace more skilled jobs (investment adviser, insurance agent, decision making), where are these new jobs going to come from, and how important will they be to a countries wealth?

Is it the labor of the US worker or the stability and multiplier of production/wealth from that labor that makes the US a great place to invest? What happens if/when the multiplier of production no longer depends on human labor, or weakly depends on human labor?

These are important things to think about when you make a strategy gated by unemployment rate.
Of course there are risks with any strategy, including buy-and-hold. What impact would substantial unemployment due to automation have on the stock market? What if it results in a decades long slump in prices? Is your strategy prepared to deal with that?
Are you willing to talk about the risks of the strategy of the post (trend following)?

This seems like the appropriate and actionable place to do so.
I am only personally willing to discuss the risks of trend following to the extent that we acknowledge the risks in the most obvious alternative (i.e. buy-and-hold). Otherwise, such discussion will obviously be unbalanced.
“It's a dangerous business, Frodo, going out your door. You step onto the road, and if you don't keep your feet, there's no knowing where you might be swept off to.” J.R.R. Tolkien,The Lord of the Rings

Forester
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Re: Larry Swedroe: Trend Following As Insurance

Post by Forester » Wed May 15, 2019 2:56 pm

le_sacre wrote:
Wed May 15, 2019 1:30 pm
I'm afraid I didn't read the whole thread, but skimming through it looks like no one has mentioned this sort of news coverage:

https://www.investmentnews.com/article/ ... is-failing

Quantitative hedge funds used to do very well by offering a trend-following strategy, but they have recently moved away from it as an industry. In my opinion, this is not a reactionary move because of recent underperformance, but a loss of confidence (among very smart people who made buckets of money this way for decades) that this algorithmic strategy has survived into the current epoch of markets. Behavioral strategies that used to work great by betting on the aggregate behavior of crowds of human investors can fail when more and more trading is done by machines, at high frequency, and in a world with qualitatively greater availability, density, and speed of information.
This article refers to CTAs though. There are more speculators willing to provide insurance to commodity hedgers and there is less dumb money from retail investors, so performance has deteriorated.

skeptic42
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Re: Larry Swedroe: Trend Following As Insurance

Post by skeptic42 » Wed May 15, 2019 2:57 pm

BJJ_GUY wrote:
Wed May 15, 2019 11:06 am
skeptic42 wrote:
Wed May 15, 2019 10:29 am

Is the apparent predictive power of trends more than a data-mined artifact? The narrative of persistent behavioral anomalies is missing the link to how one can profit from them by more than luck. And if everyone knows about trends, why are they not arbitraged away? Or are they and trend followers will experience it some day? :twisted:
Not specific to this post only, but this thread generally seems to be kind of blending various ideas, terminology, and other complex topics into the same thing. I'm inclined to believe a large majority of the debate is due more to folks referring to similar but different 'things which makes a conversation tough. Interesting topic nonetheless.

Related to the quoted comment, it might help if you think of trend-following as a 'reactive' not 'predictive' strategy. With that in mind, the next level question you ask about consistency of behavioral tendencies is more helpful to think about as explanatory, ex-post. Because trend-following in the most naive form does not attempt to predict anything, and because it's purely price based, there actually isn't an ex-ante logic needed.
If there is no implicit prediction that after a sell the price is more likely to drop further and after a buy it is more likely to go up further, then what is the point of trend following? Without this implicit prediction, trend following just adds noise to the investment process.

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Re: Larry Swedroe: Trend Following As Insurance

Post by willthrill81 » Wed May 15, 2019 2:58 pm

BJJ_GUY wrote:
Wed May 15, 2019 2:35 pm
Using economic data as an input variable may be useful as an investment indicator (I'm not debating it either way). I could be wrong here, but seems like methods that mimic systematic trading strategies are being described in this thread, but referred to as trend-following. I believe trend-following to be based purely on market/securities pricing data. Quant strategies, broadly, implement data such as fundamental/valuation, economic, technical, and of course various forms of alternative data (scraping, satellite images, and on and on).
Generally, trend following does not necessarily mean 'price trend following'. A trend in any variable or set of variables could be used. So it's a very broad term.
“It's a dangerous business, Frodo, going out your door. You step onto the road, and if you don't keep your feet, there's no knowing where you might be swept off to.” J.R.R. Tolkien,The Lord of the Rings

skeptic42
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Re: Larry Swedroe: Trend Following As Insurance

Post by skeptic42 » Wed May 15, 2019 3:21 pm

willthrill81 wrote:
Wed May 15, 2019 10:58 am

It's difficult to claim that a strategy that has worked quite well over the long-term across the total stock market, factor indices, industries, sectors, ex-U.S. equities, global currencies, fixed income, and commodities is nothing more than a sample-specific artifact.
Yes, the past performance was good in many backtests.
But why is the performance of CTAs and managed futures so bad in recent years?
Maybe, the narrative of persistent behavioral anomalies is not the whole story.
I don't know the answer, but another narrative, the apparent predictive power of trends could be an artifact in past data due to prohibitive costs in the past to exploit them.

abc132
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Re: Larry Swedroe: Trend Following As Insurance

Post by abc132 » Wed May 15, 2019 4:20 pm

willthrill81 wrote:
Wed May 15, 2019 2:56 pm

I am only personally willing to discuss the risks of trend following to the extent that we acknowledge the risks in the most obvious alternative (i.e. buy-and-hold). Otherwise, such discussion will obviously be unbalanced.
Perfect! You go first, and list all the risks you can see in trend following.

I will follow with all the risks I can see in buy and hold.

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Re: Larry Swedroe: Trend Following As Insurance

Post by willthrill81 » Wed May 15, 2019 4:50 pm

skeptic42 wrote:
Wed May 15, 2019 2:57 pm
BJJ_GUY wrote:
Wed May 15, 2019 11:06 am
skeptic42 wrote:
Wed May 15, 2019 10:29 am

Is the apparent predictive power of trends more than a data-mined artifact? The narrative of persistent behavioral anomalies is missing the link to how one can profit from them by more than luck. And if everyone knows about trends, why are they not arbitraged away? Or are they and trend followers will experience it some day? :twisted:
Not specific to this post only, but this thread generally seems to be kind of blending various ideas, terminology, and other complex topics into the same thing. I'm inclined to believe a large majority of the debate is due more to folks referring to similar but different 'things which makes a conversation tough. Interesting topic nonetheless.

Related to the quoted comment, it might help if you think of trend-following as a 'reactive' not 'predictive' strategy. With that in mind, the next level question you ask about consistency of behavioral tendencies is more helpful to think about as explanatory, ex-post. Because trend-following in the most naive form does not attempt to predict anything, and because it's purely price based, there actually isn't an ex-ante logic needed.
If there is no implicit prediction that after a sell the price is more likely to drop further and after a buy it is more likely to go up further, then what is the point of trend following? Without this implicit prediction, trend following just adds noise to the investment process.
There's a big distinction between prediction and expectancy. For instance, for a fair die, there is logically a one in six chance that '6' will come up on any given roll. Over the course of many rolls, we would expect that approximately one-sixth of all the rolls will come up '6'. But we can never predict what number will come up on any given future roll. Trend following works on the basis of expected returns and/or volatility using historical data.
“It's a dangerous business, Frodo, going out your door. You step onto the road, and if you don't keep your feet, there's no knowing where you might be swept off to.” J.R.R. Tolkien,The Lord of the Rings

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Re: Larry Swedroe: Trend Following As Insurance

Post by willthrill81 » Wed May 15, 2019 4:52 pm

skeptic42 wrote:
Wed May 15, 2019 3:21 pm
willthrill81 wrote:
Wed May 15, 2019 10:58 am

It's difficult to claim that a strategy that has worked quite well over the long-term across the total stock market, factor indices, industries, sectors, ex-U.S. equities, global currencies, fixed income, and commodities is nothing more than a sample-specific artifact.
Yes, the past performance was good in many backtests.
But why is the performance of CTAs and managed futures so bad in recent years?
Maybe, the narrative of persistent behavioral anomalies is not the whole story.
I don't know the answer, but another narrative, the apparent predictive power of trends could be an artifact in past data due to prohibitive costs in the past to exploit them.
A very plausible reason is very simple: "recent years" is not the long-term. There have been periods longer than a decade where trend following using something like the 200 DMA was significantly behind buy-and-hold. Generally, those have been during long bull markets. It's in bear markets that the strategy tends to really shine. So if a market doesn't really have a substantial downturn in a given period, we would expect trend following to have poorer returns than buy-and-hold.

But again, claiming that trend following is a statistical artifact is a really big stretch because of its very long-term track record across many disparate asset classes. The likelihood of that happening due to random chance is extremely small. But that does not necessarily mean that it will still function in precisely the same way going forward or at least over a given period of time.
“It's a dangerous business, Frodo, going out your door. You step onto the road, and if you don't keep your feet, there's no knowing where you might be swept off to.” J.R.R. Tolkien,The Lord of the Rings

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Re: Larry Swedroe: Trend Following As Insurance

Post by willthrill81 » Wed May 15, 2019 5:16 pm

abc132 wrote:
Wed May 15, 2019 4:20 pm
willthrill81 wrote:
Wed May 15, 2019 2:56 pm

I am only personally willing to discuss the risks of trend following to the extent that we acknowledge the risks in the most obvious alternative (i.e. buy-and-hold). Otherwise, such discussion will obviously be unbalanced.
Perfect! You go first, and list all the risks you can see in trend following.

I will follow with all the risks I can see in buy and hold.
The biggest risk I see by far in trend following (TF) compared to buy-and-hold (BAH) is in whipsaws (i.e. stocks are sold at a given price and bought later at a higher price) that are not adequately compensated for by avoiding enough of market downturns. All other risks I see are related to this (e.g. strategy worked in the past but not in the future, the lookback window used was inappropriate, the signals used are not appropriate, etc.).

For instance, someone using the 200 day moving average with the S&P 500 and cash as the out-of-market asset from 1990-1999 or from 2010-current would have underperformed BAH by an average of over 5% annually. But from 2000-2009, the same strategy would have had annual returns close to 8% vs. -1% for BAH. Over the entirety of the period (e.g. 1990-current), returns of both strategies would have been within about 30 basis points of each other, but the TF strategy would have had a maximum drawdown only one-third as large as that of BAH. What if the period in which you use TF looks like 1990-1999 or 2010-current? What if it looks like 2000-2009? And of course, the future could always look different from the past, which carries risk for both TF and BAH.
“It's a dangerous business, Frodo, going out your door. You step onto the road, and if you don't keep your feet, there's no knowing where you might be swept off to.” J.R.R. Tolkien,The Lord of the Rings

abc132
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Re: Larry Swedroe: Trend Following As Insurance

Post by abc132 » Wed May 15, 2019 5:44 pm

willthrill81 wrote:
Wed May 15, 2019 5:16 pm
abc132 wrote:
Wed May 15, 2019 4:20 pm
willthrill81 wrote:
Wed May 15, 2019 2:56 pm

I am only personally willing to discuss the risks of trend following to the extent that we acknowledge the risks in the most obvious alternative (i.e. buy-and-hold). Otherwise, such discussion will obviously be unbalanced.
Perfect! You go first, and list all the risks you can see in trend following.

I will follow with all the risks I can see in buy and hold.
The biggest risk I see by far in trend following (TF) compared to buy-and-hold (BAH) is in whipsaws (i.e. stocks are sold at a given price and bought later at a higher price) that are not adequately compensated for by avoiding enough of market downturns. All other risks I see are related to this (e.g. strategy worked in the past but not in the future, the lookback window used was inappropriate, the signals used are not appropriate, etc.).

For instance, someone using the 200 day moving average with the S&P 500 and cash as the out-of-market asset from 1990-1999 or from 2010-current would have underperformed BAH by an average of over 5% annually. But from 2000-2009, the same strategy would have had annual returns close to 8% vs. -1% for BAH. Over the entirety of the period (e.g. 1990-current), returns of both strategies would have been within about 30 basis points of each other, but the TF strategy would have had a maximum drawdown only one-third as large as that of BAH. What if the period in which you use TF looks like 1990-1999 or 2010-current? What if it looks like 2000-2009? And of course, the future could always look different from the past, which carries risk for both TF and BAH.
Risk can be discussed in the absence of looking at past data. What did or did not happen has little to do with the risks of a strategy. Comparing past returns has little to do with the risk of a strategy. I hope you understand this. Risks are inherent to a strategy regardless of how they performed, and past performance in no way changes the risk that was taken.

The risk of one strategy does not involve the risk of another strategy. There is no need to talk about two strategies at the same time when defining risk.

I might need a day or two, but I will try to give you an example of how we can talk about risks without referring to past performance. I will limit myself to buy and hold, and hope that you can respond in-kind.

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Re: Larry Swedroe: Trend Following As Insurance

Post by willthrill81 » Wed May 15, 2019 5:53 pm

abc132 wrote:
Wed May 15, 2019 5:44 pm
willthrill81 wrote:
Wed May 15, 2019 5:16 pm
abc132 wrote:
Wed May 15, 2019 4:20 pm
willthrill81 wrote:
Wed May 15, 2019 2:56 pm

I am only personally willing to discuss the risks of trend following to the extent that we acknowledge the risks in the most obvious alternative (i.e. buy-and-hold). Otherwise, such discussion will obviously be unbalanced.
Perfect! You go first, and list all the risks you can see in trend following.

I will follow with all the risks I can see in buy and hold.
The biggest risk I see by far in trend following (TF) compared to buy-and-hold (BAH) is in whipsaws (i.e. stocks are sold at a given price and bought later at a higher price) that are not adequately compensated for by avoiding enough of market downturns. All other risks I see are related to this (e.g. strategy worked in the past but not in the future, the lookback window used was inappropriate, the signals used are not appropriate, etc.).

For instance, someone using the 200 day moving average with the S&P 500 and cash as the out-of-market asset from 1990-1999 or from 2010-current would have underperformed BAH by an average of over 5% annually. But from 2000-2009, the same strategy would have had annual returns close to 8% vs. -1% for BAH. Over the entirety of the period (e.g. 1990-current), returns of both strategies would have been within about 30 basis points of each other, but the TF strategy would have had a maximum drawdown only one-third as large as that of BAH. What if the period in which you use TF looks like 1990-1999 or 2010-current? What if it looks like 2000-2009? And of course, the future could always look different from the past, which carries risk for both TF and BAH.
Risk can be discussed in the absence of looking at past data. What did or did not happen has little to do with the risks of a strategy. Comparing past returns has little to do with the risk of a strategy. I hope you understand this. Risks are inherent to a strategy regardless of how they performed, and past performance in no way changes the risk that was taken.

I might need a day or two, but I will try to give you an example of how we can talk about risks without referring to past performance. I will limit myself to buy and hold, and hope that you can respond in-kind.
I agree that 'resulting' (i.e. basing the merits of a strategy solely on its performance) is potentially problematic. But at the same time, past performance can at least indicate the plausibility of a strategy in the real world. In my above post, I was using past performance to illustrate how the risk I was describing actually manifested itself.

Since you didn't mention any risks yet for BAH, I'll start with the two biggest risks I see for it. First, there is the risk that the market's performance over your investment horizon is inadequate to enable you to meet your goals. This can be partially mitigated by basing your goals around conservative return estimates, but estimates are obviously no guarantee. If global stock markets mimic that of Japan over the last 30 years, even a seemingly conservative return estimate of 0% would likely be inadequate for most.

Second, there is a risk that you will abandon your strategy at the worst possible time, presumably during a deep bear market when you 'lock in' your losses as many did during the last recession. But to be fair, there is a risk that you would abandon a TF strategy at a poor time as well, presumably during a bull market when BAH is performing very well, followed by a deep bear market.
“It's a dangerous business, Frodo, going out your door. You step onto the road, and if you don't keep your feet, there's no knowing where you might be swept off to.” J.R.R. Tolkien,The Lord of the Rings

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Re: Larry Swedroe: Trend Following As Insurance

Post by whodidntante » Wed May 15, 2019 6:06 pm

abc132 wrote:
Wed May 15, 2019 12:57 pm

This of course implies that a countries stock performance and economic state relies on human capital/labor (employment).

What are the chances this is less true in the future? Are they non-zero?

Could people actually get paid to not work if machines are doing the work?


I think 10% of the thought put into past trend following should be put into what the future might look like.

Human employment was very important in the past, but may or may not be in the future.
I think I could probably support that automation has already eaten a lot of good paying jobs, and that globalization also took a bite of the same sandwich. Some of those former middle-class people went on to careers doing nothing or to be underemployed. They don't show up as unemployed either way. I'm not sure the future will have a 50% unemployment rate even if machines do my job and yours.

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Re: Larry Swedroe: Trend Following As Insurance

Post by whodidntante » Wed May 15, 2019 6:45 pm

willthrill81 wrote:
Wed May 15, 2019 1:03 pm
Yes, I got whipsawed by the last correction by about 10%. However, my strategy does not use price alone. While I don't have any taxable accounts, one could use futures options to effectively zero out one's long position in equities rather than sell for tax efficiency.
That would allow you start with no capital gain, but what if it works? You'll have to realize a gain in short order. It's still better than losing to a downtrending market, however.

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Re: Larry Swedroe: Trend Following As Insurance

Post by willthrill81 » Wed May 15, 2019 6:47 pm

whodidntante wrote:
Wed May 15, 2019 6:45 pm
willthrill81 wrote:
Wed May 15, 2019 1:03 pm
Yes, I got whipsawed by the last correction by about 10%. However, my strategy does not use price alone. While I don't have any taxable accounts, one could use futures options to effectively zero out one's long position in equities rather than sell for tax efficiency.
That would allow you start with no capital gain, but what if it works? You'll have to realize a gain in short order. It's still better than losing to a downtrending market, however.
There are obviously expenses from using future options in this way, but they are likely significantly lower than the tax burden of selling your position.
“It's a dangerous business, Frodo, going out your door. You step onto the road, and if you don't keep your feet, there's no knowing where you might be swept off to.” J.R.R. Tolkien,The Lord of the Rings

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Re: Larry Swedroe: Trend Following As Insurance

Post by abc132 » Wed May 15, 2019 6:47 pm

whodidntante wrote:
Wed May 15, 2019 6:06 pm
I think I could probably support that automation has already eaten a lot of good paying jobs, and that globalization also took a bite of the same sandwich. Some of those former middle-class people went on to careers doing nothing or to be underemployed. They don't show up as unemployed either way. I'm not sure the future will have a 50% unemployment rate even if machines do my job and yours.
Good point, but I believe it depends which unemployment rate you use.

Businesses like to know how many employees are actively looking for jobs, and the traditional unemployment rate should do a good job of this.

I have been talking about what the economy might look like when most human jobs are no longer necessary, or perform worse than their automated counterparts. Society will eventually have to make some tough decisions about whether their country is better off hiring humans for less performance, or using machines and somehow dealing with human unemployment.

This environment could be much different than one in which businesses depend on human employees and humans depend on employment, and if so, I would expect much different trends to come from whichever unemployment number you use. Businesses might not care particularly about the traditional unemployment number in such an environment, decoupling the relationship between employment and the economy.

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Re: Larry Swedroe: Trend Following As Insurance

Post by abc132 » Wed May 15, 2019 6:52 pm

willthrill81 wrote:
Wed May 15, 2019 5:53 pm

Since you didn't mention any risks yet for BAH, I'll start with the two biggest risks I see for it. First, there is the risk that the market's performance over your investment horizon is inadequate to enable you to meet your goals. This can be partially mitigated by basing your goals around conservative return estimates, but estimates are obviously no guarantee. If global stock markets mimic that of Japan over the last 30 years, even a seemingly conservative return estimate of 0% would likely be inadequate for most.

Second, there is a risk that you will abandon your strategy at the worst possible time, presumably during a deep bear market when you 'lock in' your losses as many did during the last recession. But to be fair, there is a risk that you would abandon a TF strategy at a poor time as well, presumably during a bull market when BAH is performing very well, followed by a deep bear market.
You asked for a discussion on equal footing, and now you are ignoring it.

Please respect the format you agreed to, and let me respond about BAH.

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Re: Larry Swedroe: Trend Following As Insurance

Post by willthrill81 » Wed May 15, 2019 6:54 pm

abc132 wrote:
Wed May 15, 2019 6:52 pm
willthrill81 wrote:
Wed May 15, 2019 5:53 pm

Since you didn't mention any risks yet for BAH, I'll start with the two biggest risks I see for it. First, there is the risk that the market's performance over your investment horizon is inadequate to enable you to meet your goals. This can be partially mitigated by basing your goals around conservative return estimates, but estimates are obviously no guarantee. If global stock markets mimic that of Japan over the last 30 years, even a seemingly conservative return estimate of 0% would likely be inadequate for most.

Second, there is a risk that you will abandon your strategy at the worst possible time, presumably during a deep bear market when you 'lock in' your losses as many did during the last recession. But to be fair, there is a risk that you would abandon a TF strategy at a poor time as well, presumably during a bull market when BAH is performing very well, followed by a deep bear market.
You asked for a discussion on equal footing, and now you are ignoring it.

Please respect the format you agreed to, and let me respond about BAH.
In your last post, you didn't address the risks of BAH at all and instead criticized my method of pointing out the risks I was discussing, so I felt liberty to put forward the risks I see with BAH that you didn't address at all. If you remain this contentious, I will cease responding.
“It's a dangerous business, Frodo, going out your door. You step onto the road, and if you don't keep your feet, there's no knowing where you might be swept off to.” J.R.R. Tolkien,The Lord of the Rings

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Re: Larry Swedroe: Trend Following As Insurance

Post by sixtyforty » Wed May 15, 2019 7:00 pm

willthrill81 wrote:
Wed May 15, 2019 5:53 pm
abc132 wrote:
Wed May 15, 2019 5:44 pm
willthrill81 wrote:
Wed May 15, 2019 5:16 pm
abc132 wrote:
Wed May 15, 2019 4:20 pm
willthrill81 wrote:
Wed May 15, 2019 2:56 pm

I am only personally willing to discuss the risks of trend following to the extent that we acknowledge the risks in the most obvious alternative (i.e. buy-and-hold). Otherwise, such discussion will obviously be unbalanced.
Perfect! You go first, and list all the risks you can see in trend following.

I will follow with all the risks I can see in buy and hold.
The biggest risk I see by far in trend following (TF) compared to buy-and-hold (BAH) is in whipsaws (i.e. stocks are sold at a given price and bought later at a higher price) that are not adequately compensated for by avoiding enough of market downturns. All other risks I see are related to this (e.g. strategy worked in the past but not in the future, the lookback window used was inappropriate, the signals used are not appropriate, etc.).

For instance, someone using the 200 day moving average with the S&P 500 and cash as the out-of-market asset from 1990-1999 or from 2010-current would have underperformed BAH by an average of over 5% annually. But from 2000-2009, the same strategy would have had annual returns close to 8% vs. -1% for BAH. Over the entirety of the period (e.g. 1990-current), returns of both strategies would have been within about 30 basis points of each other, but the TF strategy would have had a maximum drawdown only one-third as large as that of BAH. What if the period in which you use TF looks like 1990-1999 or 2010-current? What if it looks like 2000-2009? And of course, the future could always look different from the past, which carries risk for both TF and BAH.
Risk can be discussed in the absence of looking at past data. What did or did not happen has little to do with the risks of a strategy. Comparing past returns has little to do with the risk of a strategy. I hope you understand this. Risks are inherent to a strategy regardless of how they performed, and past performance in no way changes the risk that was taken.

I might need a day or two, but I will try to give you an example of how we can talk about risks without referring to past performance. I will limit myself to buy and hold, and hope that you can respond in-kind.

Second, there is a risk that you will abandon your strategy at the worst possible time, presumably during a deep bear market when you 'lock in' your losses as many did during the last recession. But to be fair, there is a risk that you would abandon a TF strategy at a poor time as well, presumably during a bull market when BAH is performing very well, followed by a deep bear market.
This is a really important point. Let me restate it a bit differently. First, my guess is many B&H investors do not have the correct allocation, and in fact most likely tilted toward equities especially during a bull market. It's human nature ( remember the # of threads on this forum about going to 100% stock during the last bull run ? ) Second, many B&H investors 'overestimate' their ability to withstand a brutal bear market. It's human nature. Those two factors can have devastating consequences to one's portfolio. It's really easy to imagine chanting "stay the course, stay the course" after one's portfolio is continuing to evaporate before their very eyes and the DOW is down another -700 points before the market opens. Emotions take over. Sell. I'm going to guess this happens more frequently than people care to admit.

As far as trend following goes, as Will has stated this over and over again, it's really not about beating the market it's all about avoiding the scenario described above. Accepting whipsaws is the premium paid. Regarding whipsaws, this can be minimized by some of the strategies discussed such as just simply using 50% TF / 50% B&H or just shifting your allocation. It's simple, but not necessarily easy.
"Simplicity is the ultimate sophistication" - Leonardo Da Vinci

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Re: Larry Swedroe: Trend Following As Insurance

Post by abc132 » Wed May 15, 2019 7:22 pm

willthrill81 wrote:
Wed May 15, 2019 6:54 pm

In your last post, you didn't address the risks of BAH at all and instead criticized my method of pointing out the risks I was discussing, so I felt liberty to put forward the risks I see with BAH that you didn't address at all. If you remain this contentious, I will cease responding.
I apologize for responding.

I thought you could have taken this as a chance to rephrase your own post without past performance or talking about BAH, so that we could continue on equal footing. That was your stated goal.

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Re: Larry Swedroe: Trend Following As Insurance

Post by abc132 » Wed May 15, 2019 7:25 pm

sixtyforty wrote:
Wed May 15, 2019 7:00 pm
willthrill81 wrote:
Wed May 15, 2019 5:53 pm
abc132 wrote:
Wed May 15, 2019 5:44 pm
willthrill81 wrote:
Wed May 15, 2019 5:16 pm
abc132 wrote:
Wed May 15, 2019 4:20 pm


Perfect! You go first, and list all the risks you can see in trend following.

I will follow with all the risks I can see in buy and hold.
The biggest risk I see by far in trend following (TF) compared to buy-and-hold (BAH) is in whipsaws (i.e. stocks are sold at a given price and bought later at a higher price) that are not adequately compensated for by avoiding enough of market downturns. All other risks I see are related to this (e.g. strategy worked in the past but not in the future, the lookback window used was inappropriate, the signals used are not appropriate, etc.).

For instance, someone using the 200 day moving average with the S&P 500 and cash as the out-of-market asset from 1990-1999 or from 2010-current would have underperformed BAH by an average of over 5% annually. But from 2000-2009, the same strategy would have had annual returns close to 8% vs. -1% for BAH. Over the entirety of the period (e.g. 1990-current), returns of both strategies would have been within about 30 basis points of each other, but the TF strategy would have had a maximum drawdown only one-third as large as that of BAH. What if the period in which you use TF looks like 1990-1999 or 2010-current? What if it looks like 2000-2009? And of course, the future could always look different from the past, which carries risk for both TF and BAH.
Risk can be discussed in the absence of looking at past data. What did or did not happen has little to do with the risks of a strategy. Comparing past returns has little to do with the risk of a strategy. I hope you understand this. Risks are inherent to a strategy regardless of how they performed, and past performance in no way changes the risk that was taken.

I might need a day or two, but I will try to give you an example of how we can talk about risks without referring to past performance. I will limit myself to buy and hold, and hope that you can respond in-kind.

Second, there is a risk that you will abandon your strategy at the worst possible time, presumably during a deep bear market when you 'lock in' your losses as many did during the last recession. But to be fair, there is a risk that you would abandon a TF strategy at a poor time as well, presumably during a bull market when BAH is performing very well, followed by a deep bear market.
This is a really important point. Let me restate it a bit differently. First, my guess is many B&H investors do not have the correct allocation, and in fact most likely tilted toward equities especially during a bull market. It's human nature ( remember the # of threads on this forum about going to 100% stock during the last bull run ? ) Second, many B&H investors 'overestimate' their ability to withstand a brutal bear market. It's human nature. Those two factors can have devastating consequences to one's portfolio. It's really easy to imagine chanting "stay the course, stay the course" after one's portfolio is continuing to evaporate before their very eyes and the DOW is down another -700 points before the market opens. Emotions take over. Sell. I'm going to guess this happens more frequently than people care to admit.

As far as trend following goes, as Will has stated this over and over again, it's really not about beating the market it's all about avoiding the scenario described above. Accepting whipsaws is the premium paid. Regarding whipsaws, this can be minimized by some of the strategies discussed such as just simply using 50% TF / 50% B&H or just shifting your allocation. It's simple, but not necessarily easy.
The conclusions are already in. I see my response is not needed here. Best of luck to you all.

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Re: Larry Swedroe: Trend Following As Insurance

Post by BJJ_GUY » Thu May 16, 2019 1:36 am

skeptic42 wrote:
Wed May 15, 2019 2:57 pm
BJJ_GUY wrote:
Wed May 15, 2019 11:06 am
skeptic42 wrote:
Wed May 15, 2019 10:29 am

Is the apparent predictive power of trends more than a data-mined artifact? The narrative of persistent behavioral anomalies is missing the link to how one can profit from them by more than luck. And if everyone knows about trends, why are they not arbitraged away? Or are they and trend followers will experience it some day? :twisted:
Not specific to this post only, but this thread generally seems to be kind of blending various ideas, terminology, and other complex topics into the same thing. I'm inclined to believe a large majority of the debate is due more to folks referring to similar but different 'things which makes a conversation tough. Interesting topic nonetheless.

Related to the quoted comment, it might help if you think of trend-following as a 'reactive' not 'predictive' strategy. With that in mind, the next level question you ask about consistency of behavioral tendencies is more helpful to think about as explanatory, ex-post. Because trend-following in the most naive form does not attempt to predict anything, and because it's purely price based, there actually isn't an ex-ante logic needed.
If there is no implicit prediction that after a sell the price is more likely to drop further and after a buy it is more likely to go up further, then what is the point of trend following? Without this implicit prediction, trend following just adds noise to the investment process.
Skeptic,
I don't necessarily think that what I'm saying is entirely different from what you describe. The only problem is we disagree on how we define predictive vs reactive in this particular context. Let me explain a few ways to see if you agree or not.

Trend-Following. This name alone points to the idea that the strategy is reactive as you can't follow that which hasn't yet occurred. Time series momentum is very specific to historic data. When the recent past data is trending, the strategy follows the trends in a reactionary way in the form of increasing long (short) to positive (negative) trends in each particular market traded.

I don't disagree that supply/demand dynamics drive immediate changes in price. This doesn't really dispute the claim that trend-following is reactive, and I certainly don't see how it would actually support the idea that trend-following attempts to predict the future.

The disconnect, I think, is due to the fact that we aren't separating two distinct things:
1.) How? Meaning how is the strategy is implemented? (Answer: Based purely on past data, and in a naive way, such that trend-following is no more than a naive reactionary model).
2.) Why? Meaning why has this strategy worked the way it has historically, and why is the expectation for this to continue? (Answer: I'm not arguing for or against any of the reasons - which include various behavioral theories, central bank policy, structural and technicals market dynamics etc,).

Related to the WHY?... None of this matters, unless we're debating the efficacy of trend-following going forward. I am not. I am simply saying that the way trend following strategies are actually implemented have nothing to do with the fundamental outlook on the prospects for the strategy.

Trend-following strategies are in no way making decisions based on any calculated forecasts into the near/long term future.

**Note:
For those who are defining trend-following as anything other than the use of time series momentum models, then you must be careful in how you think about the various ways trend-following indices/funds have behaved/performed historically. The second macro data, or otherwise, is utilized as input variables for trading rules, then you have crossed into a predictive strategy. While discretionary macro trading might work fantastic for some folks in here, I think it's prudent to separate these constructs from trend-following (and the vast amounts of academic research explaining historical performance, as well as anticipated behavior across different market environments)**

skeptic42
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Re: Larry Swedroe: Trend Following As Insurance

Post by skeptic42 » Thu May 16, 2019 2:41 am

willthrill81 wrote:
Wed May 15, 2019 4:50 pm
skeptic42 wrote:
Wed May 15, 2019 2:57 pm
BJJ_GUY wrote:
Wed May 15, 2019 11:06 am
skeptic42 wrote:
Wed May 15, 2019 10:29 am

Is the apparent predictive power of trends more than a data-mined artifact? The narrative of persistent behavioral anomalies is missing the link to how one can profit from them by more than luck. And if everyone knows about trends, why are they not arbitraged away? Or are they and trend followers will experience it some day? :twisted:
Not specific to this post only, but this thread generally seems to be kind of blending various ideas, terminology, and other complex topics into the same thing. I'm inclined to believe a large majority of the debate is due more to folks referring to similar but different 'things which makes a conversation tough. Interesting topic nonetheless.

Related to the quoted comment, it might help if you think of trend-following as a 'reactive' not 'predictive' strategy. With that in mind, the next level question you ask about consistency of behavioral tendencies is more helpful to think about as explanatory, ex-post. Because trend-following in the most naive form does not attempt to predict anything, and because it's purely price based, there actually isn't an ex-ante logic needed.
If there is no implicit prediction that after a sell the price is more likely to drop further and after a buy it is more likely to go up further, then what is the point of trend following? Without this implicit prediction, trend following just adds noise to the investment process.
There's a big distinction between prediction and expectancy. For instance, for a fair die, there is logically a one in six chance that '6' will come up on any given roll. Over the course of many rolls, we would expect that approximately one-sixth of all the rolls will come up '6'. But we can never predict what number will come up on any given future roll. Trend following works on the basis of expected returns and/or volatility using historical data.
Alright, then call it expectation and not prediction. So, a trend follower expects to beat the market, because he sells when it is more likely to go down further and buys when it is more likely to go up further, because he can identify the trend and he is implicit predicting/expecting that a trend keeps going and he can follow it. My point still remains, if the trading signal turns out to be random and not at least slightly predictive (more often right than wrong), then you just add random noise to your portfolio.

To your other point, I agree that it is very unlikely that the existence of trends in past data is just a random artifact. But, there could be other explanations for it than 'persistent behavioral anomalies'. And it wouldn't be the first time in investing that something really unlikely still happens.
Last edited by skeptic42 on Thu May 16, 2019 3:53 am, edited 1 time in total.

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Re: Larry Swedroe: Trend Following As Insurance

Post by skeptic42 » Thu May 16, 2019 2:59 am

BJJ_GUY wrote:
Thu May 16, 2019 1:36 am
skeptic42 wrote:
Wed May 15, 2019 2:57 pm
BJJ_GUY wrote:
Wed May 15, 2019 11:06 am
skeptic42 wrote:
Wed May 15, 2019 10:29 am

Is the apparent predictive power of trends more than a data-mined artifact? The narrative of persistent behavioral anomalies is missing the link to how one can profit from them by more than luck. And if everyone knows about trends, why are they not arbitraged away? Or are they and trend followers will experience it some day? :twisted:
Not specific to this post only, but this thread generally seems to be kind of blending various ideas, terminology, and other complex topics into the same thing. I'm inclined to believe a large majority of the debate is due more to folks referring to similar but different 'things which makes a conversation tough. Interesting topic nonetheless.

Related to the quoted comment, it might help if you think of trend-following as a 'reactive' not 'predictive' strategy. With that in mind, the next level question you ask about consistency of behavioral tendencies is more helpful to think about as explanatory, ex-post. Because trend-following in the most naive form does not attempt to predict anything, and because it's purely price based, there actually isn't an ex-ante logic needed.
If there is no implicit prediction that after a sell the price is more likely to drop further and after a buy it is more likely to go up further, then what is the point of trend following? Without this implicit prediction, trend following just adds noise to the investment process.
Skeptic,
I don't necessarily think that what I'm saying is entirely different from what you describe. The only problem is we disagree on how we define predictive vs reactive in this particular context. Let me explain a few ways to see if you agree or not.

Trend-Following. This name alone points to the idea that the strategy is reactive as you can't follow that which hasn't yet occurred. Time series momentum is very specific to historic data. When the recent past data is trending, the strategy follows the trends in a reactionary way in the form of increasing long (short) to positive (negative) trends in each particular market traded.

I don't disagree that supply/demand dynamics drive immediate changes in price. This doesn't really dispute the claim that trend-following is reactive, and I certainly don't see how it would actually support the idea that trend-following attempts to predict the future.

The disconnect, I think, is due to the fact that we aren't separating two distinct things:
1.) How? Meaning how is the strategy is implemented? (Answer: Based purely on past data, and in a naive way, such that trend-following is no more than a naive reactionary model).
2.) Why? Meaning why has this strategy worked the way it has historically, and why is the expectation for this to continue? (Answer: I'm not arguing for or against any of the reasons - which include various behavioral theories, central bank policy, structural and technicals market dynamics etc,).

Related to the WHY?... None of this matters, unless we're debating the efficacy of trend-following going forward. I am not. I am simply saying that the way trend following strategies are actually implemented have nothing to do with the fundamental outlook on the prospects for the strategy.

Trend-following strategies are in no way making decisions based on any calculated forecasts into the near/long term future.

**Note:
For those who are defining trend-following as anything other than the use of time series momentum models, then you must be careful in how you think about the various ways trend-following indices/funds have behaved/performed historically. The second macro data, or otherwise, is utilized as input variables for trading rules, then you have crossed into a predictive strategy. While discretionary macro trading might work fantastic for some folks in here, I think it's prudent to separate these constructs from trend-following (and the vast amounts of academic research explaining historical performance, as well as anticipated behavior across different market environments)**
Thanks for your explanation.
Sure, the strategy is reactive, but it implicitly assumes the existence of trends which can be followed, that's why it is called trend following. A trend is, if something goes down it goes down further and if it goes up it goes up further. So, there is this implicit prediction or expectation involved. Without that, trend following wouldn't make any sense, because switching randomly in and out of the market is a waste of time and money.
So, what is the point of trend following if it is not at least slightly predictive (more often right than wrong)?

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Re: Larry Swedroe: Trend Following As Insurance

Post by Forester » Thu May 16, 2019 4:04 am

Past performance has a tendency to persist. Stocks sorted on their prior 6 or 12 month returns, separated into deciles, show a perfect staircase of increasing performance for the subsequent 12 months. Losers continue to lose.

To be frank; we should be more sceptical of the efficacy of stock momentum investing, versus applying the same method to stock indices. It's far more expensive to continually churn 50 stocks per quarter, than to trade an index ETF once or twice a year.

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Re: Larry Swedroe: Trend Following As Insurance

Post by james22 » Thu May 16, 2019 6:02 am

I'd be curious to see the handoff between momentum and value funds as stocks rise and fall, the former believing they'll continue their performance and the latter believing they'll turn around.
25% BRK l 25% BAM l 8% SV (VSIAX) l 8% EM (VEMAX) l 4% FNMA/FMCC l 4% FNMAS/FMCKJ l 25% Stable Value

skeptic42
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Re: Larry Swedroe: Trend Following As Insurance

Post by skeptic42 » Thu May 16, 2019 6:18 am

Forester wrote:
Thu May 16, 2019 4:04 am
Past performance has a tendency to persist. Stocks sorted on their prior 6 or 12 month returns, separated into deciles, show a perfect staircase of increasing performance for the subsequent 12 months. Losers continue to lose.

To be frank; we should be more sceptical of the efficacy of stock momentum investing, versus applying the same method to stock indices. It's far more expensive to continually churn 50 stocks per quarter, than to trade an index ETF once or twice a year.
It was my understanding that trend following is based on the observation that past performance tend to predict future performance and that there was some exploitable duration of these trends.
Why wasn't that behavior arbitraged away in the past?
I suspect there is another explanation than the 'persistent behavioral anomalies' narrative.
And there is a real risk for trend followers that the duration of trends could change in the future which they would notice only after the fact.

So, good luck to you trend followers that the trends persist!

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Re: Larry Swedroe: Trend Following As Insurance

Post by BJJ_GUY » Thu May 16, 2019 8:05 am

skeptic42 wrote:
Thu May 16, 2019 6:18 am
Forester wrote:
Thu May 16, 2019 4:04 am
Past performance has a tendency to persist. Stocks sorted on their prior 6 or 12 month returns, separated into deciles, show a perfect staircase of increasing performance for the subsequent 12 months. Losers continue to lose.

To be frank; we should be more sceptical of the efficacy of stock momentum investing, versus applying the same method to stock indices. It's far more expensive to continually churn 50 stocks per quarter, than to trade an index ETF once or twice a year.
It was my understanding that trend following is based on the observation that past performance tend to predict future performance and that there was some exploitable duration of these trends.
Why wasn't that behavior arbitraged away in the past?
I suspect there is another explanation than the 'persistent behavioral anomalies' narrative.
And there is a real risk for trend followers that the duration of trends could change in the future which they would notice only after the fact.

So, good luck to you trend followers that the trends persist!
Trend-following does benefit from trends persisting. But it's all rules-based, so the various models decide when to start buying or selling. Duration of trends change all the time, of course. This is the reason most have short, medium, and long term (at least to some degree, though short maybe harder for the really big guys).

The thought on the role of these funds, as you asked in a different post - something like what's the point? They are expected to do well in a prolonged bear market, and also during a prolonged bull market. Choppy markets are no good.

One other thing, the reason they are viewed as such good defense is because when the trends persist these models add to the long (short) position. This makes them act like they are long volatility strategies, and due to increasing position into a trend, the payoff actually starts looking convex.

Full disclosure here: I'm not a big fan of trend-following, so I'm just trying to provide an argument somewhat in-line with what those more knowledgeable would say

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Re: Larry Swedroe: Trend Following As Insurance

Post by garlandwhizzer » Thu May 16, 2019 12:13 pm

Thanks for your responses to my questions, willthrill81. Sounds like you have thought it out well and fully understand the pluses and minuses of your trend following strategy. All strategies have strengths and weaknesses, helping in some market conditions and hurting in other market conditions. Your trend following strategy will likely do exactly what you intend it to do, offer considerable downside protection in severe bear markets, more downside protection than alternates in very serious market declines like 2007 - 2009. Like everything else worth having, that protection does not typically come free of charge.

Garland Whizzer

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Re: Larry Swedroe: Trend Following As Insurance

Post by nisiprius » Thu May 16, 2019 12:29 pm

Does anyone know any examples of real-world mutual funds that a) are known to use trend following, and b) have had inception earlier than 2008... and if possible earlier than 2000... so that we can see how they did in bear markets, and how they did compared to stock/bond allocations with comparable drawdowns?
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Re: Larry Swedroe: Trend Following As Insurance

Post by Forester » Thu May 16, 2019 3:48 pm

nisiprius wrote:
Thu May 16, 2019 12:29 pm
Does anyone know any examples of real-world mutual funds that a) are known to use trend following, and b) have had inception earlier than 2008... and if possible earlier than 2000... so that we can see how they did in bear markets, and how they did compared to stock/bond allocations with comparable drawdowns?
2015 start date for this one

https://www.paceretfs.com/products/ptlc

The chart is really something

https://stockcharts.com/freecharts/perf.php?ptlc,spy
Last edited by Forester on Thu May 16, 2019 3:53 pm, edited 1 time in total.

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Re: Larry Swedroe: Trend Following As Insurance

Post by willthrill81 » Thu May 16, 2019 3:52 pm

garlandwhizzer wrote:
Thu May 16, 2019 12:13 pm
Thanks for your responses to my questions, willthrill81. Sounds like you have thought it out well and fully understand the pluses and minuses of your trend following strategy. All strategies have strengths and weaknesses, helping in some market conditions and hurting in other market conditions. Your trend following strategy will likely do exactly what you intend it to do, offer considerable downside protection in severe bear markets, more downside protection than alternates in very serious market declines like 2007 - 2009. Like everything else worth having, that protection does not typically come free of charge.

Garland Whizzer
Thanks for the kind words. :beer I definitely tried to do my due diligence before I moved to the 'dark side'.

I still believe that BAH is a very good strategy, probably optimal for most investors. That being said, the vibe I regularly get from many posts suggests to me that many investors are too aggressive in their AA.
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Re: Larry Swedroe: Trend Following As Insurance

Post by skeptic42 » Thu May 16, 2019 3:56 pm

nisiprius wrote:
Thu May 16, 2019 12:29 pm
Does anyone know any examples of real-world mutual funds that a) are known to use trend following, and b) have had inception earlier than 2008... and if possible earlier than 2000... so that we can see how they did in bear markets, and how they did compared to stock/bond allocations with comparable drawdowns?
I don't know, but Larry mentions managed futures funds (such as AQR Managed Futures Strategy Fund) in the article. If I understand it correctly, these funds should use trend following in all markets. Another one is the Guggenheim Managed Futures Strategy Fund which is worth a look, because it is longer in existence.

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Re: Larry Swedroe: Trend Following As Insurance

Post by Beliavsky » Sun May 19, 2019 7:45 pm

nisiprius wrote:
Tue May 14, 2019 7:58 am
Although words have a range of meanings it would be best if people would not call investments "insurance" or insurance "investments." The core of the word "insurance" is sure, certain, secure. The usual meaning of "insurance" is a contract with an insurer to pay certain amounts of money if certain things happen, enforceable in a court of law, and as certain as it's possible for humans and the legal system to make it.

An alleged tendency of an investment strategy to behave in a certain way is not "insurance." During the 1987 crash, when the Dow dropped 22% in a single day, "portfolio insurance" didn't provide any protection at all, and someone whose "portfolio insurance" didn't insure their portfolio could do nothing about it but feel sad.

Swedroe's conclusion is
The evidence shows that while trend-following strategies will tend to lag the market over even long periods (creating the risk of tracking-error regret for impatient investors), they tend to perform best just when their benefits are needed most—in severe market downturn.
"Tend to" (or better, "have tended to") is not "insurance."
AQR has a new paper

Trends Everywhere
Abstract
We provide new out-of-sample evidence on trend-following investing by studying its performance for 82 securities not previously examined and 16 long-short equity factors. Specifically, we study the performance of time series momentum for emerging market equity index futures, fixed income swaps, emerging market currencies, exotic commodity futures, credit default swap indices, volatility futures, and long-short equity factors. We find that time series momentum has worked across these asset classes and across several trend horizons. We examine the co-movement of trends across asset classes and factors, the performance during different market environments, and discuss the implications for investors.

Quoting the paper, which uses 12-month momentum as the signal,

"We find strong evidence for time series momentum across the assets and factors that we study. Over our sample period, the gross Sharpe ratio of 12-month time series momentum for traditional assets is 1.17, and the strategy delivers an even higher Sharpe ratio of 1.34 for the alternative assets. The Sharpe ratio for long-short equity factors is 0.95, and, when we diversify across all three asset groups, the combined trend-following strategy yields a gross Sharpe ratio of 1.60."

One can look at Figure 3. Time Series Momentum Smile and decide if the scatterplots of trend-following return vs. asset return are strong enough describe trend-following as "insurance".

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Re: Larry Swedroe: Trend Following As Insurance

Post by stlutz » Sun May 19, 2019 8:03 pm

Has anyone run across any type of comparison between using moving averages to protect yourself against big downturns as opposed to using put options?

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Re: Larry Swedroe: Trend Following As Insurance

Post by nisiprius » Sun May 19, 2019 8:29 pm

skeptic42 wrote:
Thu May 16, 2019 3:56 pm
nisiprius wrote:
Thu May 16, 2019 12:29 pm
Does anyone know any examples of real-world mutual funds that a) are known to use trend following, and b) have had inception earlier than 2008... and if possible earlier than 2000... so that we can see how they did in bear markets, and how they did compared to stock/bond allocations with comparable drawdowns?
I don't know, but Larry mentions managed futures funds (such as AQR Managed Futures Strategy Fund) in the article. If I understand it correctly, these funds should use trend following in all markets. Another one is the Guggenheim Managed Futures Strategy Fund which is worth a look, because it is longer in existence.
Those two funds seem like bad jokes to me. Comparing them to Vanguard Balanced Index (60/40 stocks/bonds, with no trend following), and to a money market fund (VMMXX), it is seriously hard for me to see why anyone would be interested in them.

The presumably-trend-following AQR Managed Futures Strategy, AQMIX, blue, on a $10,000 investment, managed to earn $586 while Balanced Index, orange, earned $12,550. And yet AQMIX had higher volatility than Balanced Index. Furthermore, you could have earned almost as much, with zero volatility, in a money market fund (green).

Source

Image

The Guggenheim Series Trust Managed Futures Fund, RYIFX, has managed to turn $10,000 into $8,212, i.e. actually lose a noticeable amount of money during the decade it has been in existence. And yet it had more than twice the volatility of Balanced Index.

Source

Image

I don't know whether the problem here is trend-following or whether it is simply managed futures, but in any case surely these are staggeringly bad results?

(And, before someone talks about "low correlation" or "could help the portfolio as a whole:" I asked PortfolioVisualizer to optimize a portfolio of Balanced Index (VBIAX) and AQR Managed Futures (AQMIX), and the optimum was... as I expected... 100% VBIAX, 0% AQMIX.)
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Re: Larry Swedroe: Trend Following As Insurance

Post by Forester » Mon May 20, 2019 4:24 am

nisiprius wrote:
Sun May 19, 2019 8:29 pm
skeptic42 wrote:
Thu May 16, 2019 3:56 pm
nisiprius wrote:
Thu May 16, 2019 12:29 pm
Does anyone know any examples of real-world mutual funds that a) are known to use trend following, and b) have had inception earlier than 2008... and if possible earlier than 2000... so that we can see how they did in bear markets, and how they did compared to stock/bond allocations with comparable drawdowns?
I don't know, but Larry mentions managed futures funds (such as AQR Managed Futures Strategy Fund) in the article. If I understand it correctly, these funds should use trend following in all markets. Another one is the Guggenheim Managed Futures Strategy Fund which is worth a look, because it is longer in existence.
Those two funds seem like bad jokes to me. Comparing them to Vanguard Balanced Index (60/40 stocks/bonds, with no trend following), and to a money market fund (VMMXX), it is seriously hard for me to see why anyone would be interested in them.

The presumably-trend-following AQR Managed Futures Strategy, AQMIX, blue, on a $10,000 investment, managed to earn $586 while Balanced Index, orange, earned $12,550. And yet AQMIX had higher volatility than Balanced Index. Furthermore, you could have earned almost as much, with zero volatility, in a money market fund (green).

Source

Image

The Guggenheim Series Trust Managed Futures Fund, RYIFX, has managed to turn $10,000 into $8,212, i.e. actually lose a noticeable amount of money during the decade it has been in existence. And yet it had more than twice the volatility of Balanced Index.

Source

Image

I don't know whether the problem here is trend-following or whether it is simply managed futures, but in any case surely these are staggeringly bad results?

(And, before someone talks about "low correlation" or "could help the portfolio as a whole:" I asked PortfolioVisualizer to optimize a portfolio of Balanced Index (VBIAX) and AQR Managed Futures (AQMIX), and the optimum was... as I expected... 100% VBIAX, 0% AQMIX.)
These funds are unrelated to a strategy which is long the S&P or long bonds. They are trading commodity options, doing all kinds of things under the term 'Trend'. Stocks have a positive expected return whereas livestock futures are a zero sum game.

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Re: Larry Swedroe: Trend Following As Insurance

Post by nisiprius » Mon May 20, 2019 6:17 am

As skeptic42 notes, Larry Swedroe writes in the article:
Investors looking to protect themselves from severe drawdowns (such as retirees, for whom sequence risk should be a paramount concern) should consider including an allocation to a diversified trend-following strategy, usually in the form of a managed futures fund (such as AQR Managed Futures Strategy Fund), as it has historically provided insurance against tail risks.
But I don't see that.

AQMIX had inception on 1/6/2010.

Using PortfolioVisualizer, which automatically limits the time frame to 2/2010 when AQMIX is included, the worst drawdown in Total Stock was -17.74%, May 2011 to September 2011.

The worst drawdown in a 60/40 portfolio of Total Stock and Total Bond was -9.04%, again May 2011 to September 2011.

I'm not sure how Larry Swedroe would suggest using AQMIX in this portfolio, but let's say we had 20% AQMIX to the portfolio, and use it to replace bonds, i.e. 60% stocks, 20% bonds, 20% AQMIX managed futures. The result would have been to make the drawdown slightly worse, while at the same time reducing return:

Source
Image

As we'll see below, if we had used it to replace stocks, i.e. 40% stocks, 20% bonds, 20% AQMIX managed futures, then, yes, it would have mitigated the drawdown, from -9.04% (portfolio 1, blue) to -6.83% (portfolio 2, red) sure. But it also severely cut return. Costly "insurance."

Instead of replacing 20% of the stocks with AQMIX, another option for reducing the tail risk of stocks is simply to use a lower stock allocation--move 20% of the portfolio from stocks to bonds, use a 40/60 allocation. Just as with AQMIX, this reduces, but hardly eliminates both drawdowns, while reducing return. This would have given us better mitigation of drawdowns, and about the same (microscopically higher) return than if we'd used AQMIX.

Source

Portfolio 1, 60/40, blue.
Portfolio 2, 60% stocks, 20% bonds, 20% AQMIX, red.
Portfolio 3, 40/60, yellow.

Image

Larry Swedroe says "AQR Managed Futures Strategy Fund... has historically provided insurance against tail risks." We can cut tail risk in stocks just by using a lower stock allocation. I wouldn't call that "insurance," of course, because to me "insurance" means nearly complete protection a hazard, at the cost of an affordable premium. But I don't see how you could have used AQMIX to do anything better.
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Re: Larry Swedroe: Trend Following As Insurance

Post by thx1138 » Mon May 20, 2019 7:35 am

I think the problem is Larry is recommending a managed futures fund that doesn't extend back far enough to actually show any help with tails. A 17% decline really isn't a "tail" - that's just business as usual for an equity market. So looking at managed futures back to 2010 really isn't analyzing tails since there weren't any tails in that time period.

AQR of course has a nice glossy report on how managed futures performed during 2008-9 which most definitely is a tail. And then we are down the rabbit hole of will the new fund actually work that way, small number statistics and the like.

Of course what the analysis of post-2010 data shows quite well is there is a significant premium to be paid when other markets are doing well...

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Re: Larry Swedroe: Trend Following As Insurance

Post by Random Walker » Mon May 20, 2019 8:07 am

thx1138 wrote:
Mon May 20, 2019 7:35 am
I think the problem is Larry is recommending a managed futures fund that doesn't extend back far enough to actually show any help with tails. A 17% decline really isn't a "tail" - that's just business as usual for an equity market. So looking at managed futures back to 2010 really isn't analyzing tails since there weren't any tails in that time period.

AQR of course has a nice glossy report on how managed futures performed during 2008-9 which most definitely is a tail. And then we are down the rabbit hole of will the new fund actually work that way, small number statistics and the like.

Of course what the analysis of post-2010 data shows quite well is there is a significant premium to be paid when other markets are doing well...
I generally agree. I think the real test is an extended equity bear market, 2-3 years in length, like 1972-1974.

Dave

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Re: Larry Swedroe: Trend Following As Insurance

Post by skeptic42 » Mon May 20, 2019 8:19 am

Forester wrote:
Mon May 20, 2019 4:24 am
These funds are unrelated to a strategy which is long the S&P or long bonds. They are trading commodity options, doing all kinds of things under the term 'Trend'. Stocks have a positive expected return whereas livestock futures are a zero sum game.
These managed futures funds should exploit trends, they can bet on upward and downward trends, right? The claim is that trends are a persistent and exploitable feature of the markets, right?
Increasing the Sharpe ratio, more return for less risk, by trend following (the link is broken):
Beliavsky wrote:
Sun May 19, 2019 7:45 pm

AQR has a new paper

Trends Everywhere
Abstract
We provide new out-of-sample evidence on trend-following investing by studying its performance for 82 securities not previously examined and 16 long-short equity factors. Specifically, we study the performance of time series momentum for emerging market equity index futures, fixed income swaps, emerging market currencies, exotic commodity futures, credit default swap indices, volatility futures, and long-short equity factors. We find that time series momentum has worked across these asset classes and across several trend horizons. We examine the co-movement of trends across asset classes and factors, the performance during different market environments, and discuss the implications for investors.

Quoting the paper, which uses 12-month momentum as the signal,

"We find strong evidence for time series momentum across the assets and factors that we study. Over our sample period, the gross Sharpe ratio of 12-month time series momentum for traditional assets is 1.17, and the strategy delivers an even higher Sharpe ratio of 1.34 for the alternative assets. The Sharpe ratio for long-short equity factors is 0.95, and, when we diversify across all three asset groups, the combined trend-following strategy yields a gross Sharpe ratio of 1.60."

One can look at Figure 3. Time Series Momentum Smile and decide if the scatterplots of trend-following return vs. asset return are strong enough describe trend-following as "insurance".
If these managed futures funds had difficulties to deliver attractive Sharpe ratios, then trends were either not reliable persistent or not easily exploitable. I don't see how trend following can be called insurance. Unfortunate trades by trend following could cause a larger drawdown than the one it should reduce.
A drawdown can be simply reduced by reducing the exposure to risky assets BEFORE the drawdown happens. And as there is always the risk of a drawdown, allocating less to risky assets all the time will reduce drawdowns all the time. Sure, the price for this insurance is a lower expected return. 8-)

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Re: Larry Swedroe: Trend Following As Insurance

Post by WhyNotUs » Mon May 20, 2019 8:33 am

Forester wrote:
Wed May 15, 2019 12:44 pm

Almost seems too good to be true!

Image
Go get em Tiger! You should be all in right now, at least in US employment. Let us know how it turns out.

Larry has always seemed like a really smart guy and he seems to have to write a lot of columns. Over time one either becomes redundant (diverse, low expense, time in market) or has to really look around for increasingly smaller somethings to say or promote. Taylor exemplifies the former and Larry the latter. Both appeal to different mind sets, if you really think that you are smarter and better looking, Larry's columns will be of more interest.
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Re: Larry Swedroe: Trend Following As Insurance

Post by nisiprius » Mon May 20, 2019 8:35 am

thx1138 wrote:
Mon May 20, 2019 7:35 am
I think the problem is Larry is recommending a managed futures fund that doesn't extend back far enough to actually show any help with tails. A 17% decline really isn't a "tail" - that's just business as usual for an equity market. So looking at managed futures back to 2010 really isn't analyzing tails since there weren't any tails in that time period.

AQR of course has a nice glossy report on how managed futures performed during 2008-9 which most definitely is a tail. And then we are down the rabbit hole of will the new fund actually work that way, small number statistics and the like.

Of course what the analysis of post-2010 data shows quite well is there is a significant premium to be paid when other markets are doing well...
Well, I am still puzzled as to whether we are talking about "trend following" or "managed futures."

I can't agree that 2011 shouldn't count. True, the official measurement (daily on the S&P 500) was "only" -19.8% and not -20.000%. 0.2% more and it would have been a "bear market." It certainly created a good idea of angst in the forum at the time. Sure, you can call it "business as usual for an equity market" but you could just as well call a -50% decline "business as usual." -10% corrections happen all the time. -20% declines, or, OK, -19% declines, do not. In this list, using -19%, I see six in fifty years.

And AQMIX did experience less of a drawdown in 2011. It declined -9.85% compared to -17.71% for Total Stock. If the claim is that trend following reduces drawdowns, it did. If the claim is that you could use it like drawdown insurance in a portfolio, and cut drawdowns at a much lower cost than just by cutting stock allocation, it didn't.

In any case, if we look at Morningstar's list of funds in the "managed futures" category, eliminate ones for which five-year returns are not shown (and thus less than five years old), eliminate duplicate share classes (retaining the one with the highest five-year returns in every case), we are left with 20 funds. If we (laboriously) look up the inception date for each fund, what we find is that Guggenheim Managed Futures Strategy, RYIFX, already identified by another poster, appears to be the very oldest managed futures mutual fund, and its inception date was 5/20/2009.

So I'm just left not know what to say, except that "historically" there does not seem to be any example of a managed futures fund with inception prior to 5/20/2009, and thus we have no way to judge whether any mitigation of the 2008-2009 decline would have been worth the cost in reduced performance.

Backtesting is what it is--the backtesting for "commodities" (actually CCF's) was impressive around 2006, but failed to pan out going forward in the real world, with real mutual funds, playing for keeps with real money.

Finally, please remember that the test is not whether adding some asset class would have reduced drawdowns. The test is whether it did so better than you would have done just by cutting stock allocation.

The whole list is:

05/20/2009 RYIFX Guggenheim Managed Futures Strategy I
12/31/2009 MHFIX Equinox MutualHedge Futures Strategy I
01/06/2010 AQMIX AQR Managed Futures Strategy I
04/29/2010 MFTNX Arrow Managed Futures Strategy Instl
07/30/2010 ASFYX Natixis ASG Managed Futures Strategy Y
08/26/2010 MFTIX Altegris Managed Futures Strategy I
02/01/2011 GRRIX James Alpha Macro I
03/24/2011 LFMIX LoCorr Macro Strategies I
10/31/2011 EVOIX Altegris Futures Evolution Strategy I
12/30/2011 LCSIX LoCorr Long/Short Commodity Strats I
02/29/2012 GMSSX Goldman Sachs Managed Futs Strat Instl
09/10/2012 EQCHX Equinox Chesapeake Strategy I
09/28/2012 CSAIX Credit Suisse Managed Futs Strat I
03/04/2013 EBSIX Equinox Campbell Strategy I
07/16/2013 QMHIX AQR Managed Futures Strategy HV I
12/31/2013 IGMLX Insignia Macro I
12/31/2013 PQTIX PIMCO TRENDS Managed Futures Strat Instl
12/31/2013 SUPIX Superfund Managed Futures Strategy I
02/12/2014 AGFZX 361 Global Managed Futures Strategy I
04/01/2014 SKLIX Steben Managed Futures Strategy I
Last edited by nisiprius on Mon May 20, 2019 9:13 am, edited 7 times in total.
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