The Wrong Way to Think to Profit

A friend who works with a trend following fund writes:

This is classic and I had to share it with you. This was the response I got from a CIO when I showed him our trend following strategy…damn those pesky 100% years! “I have never made a secret of the fact that I am not keen on your fund. My thoughts are that the fund has had two huge years of 70% and 150% and these figures blow out the averages. As of September I see the fund is down 10%, so it’s not for me.”

Exactly. Those who strive for the impossible dream of consistent month over month positive returns are always left holding the bag. Trend following delivers lumpy returns and over the long term compounded–that’s how you get rich.

2 thoughts on “The Wrong Way to Think to Profit

  1. This is also the same reason most global macro funds suck now, or at least part of it. Their investors have become so institutionalized that lumpy performance and lower Sharpe Ratios are intolerable. Guys that run multi-billion dollar funds only exacerbate the problem when the amount of money they manage effectively sizes them out of every market except US index futures, government bonds, and FX, but allows them to pay for their fuel or their private ski trips to Switzerland, so you basically are selling your soul to pension funds and other “Sharpe seeking” investors in return for the assets under management fee. Even though I am definitely not a trend follower by any definition (I buy the dip and fade rallies quite often for someone who reads this site), one thing I can sympathize with 100% of the time is how skewed proper money management skills are vs. the money management skills investors are looking for. Soros calls this “perception vs. reality” and the divergence here is enormous.

  2. Re read my post on why most investors in funds are just not wired to invest in trend following firms. It is the same reason most people are just not “wired” to trade successfully. Which why only a systematic trading system makes sense, and nothing else. Again, Covel is really doing great work, but at the end of the day the tide is just too strong. Investors in hedge funds are completely irrational (5% of money invested each year goes into systematic trend following strategies! Hello?). If they were rational, they would only invest in trend following strategies. That is how they are wired. It is just in our nature to be completely irrational when it comes to making or loosing money. Today the whole game is skewed towards stuffing the investor on the management fee on large AUMs. Ask yourself how is it that so many hedge fund managers who have hardly made any money for their investors can afford private jets and 50 meter yachts and condos that regularly feature in Architectural Digest?

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