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Why Trend Following Works

From SEB Asset Management S.A.:

If you believe that the world has changed for ever in such a way that there will no longer be any business cycles, that there will no longer be any severe crises situations (e.g. banking crises, government bond crises, real estate crises, junk bond crises, corporate bankruptcies, skyrocketing unemployment rates etc), that there will not be any large movements in the currency markets, that there will be no major political, social or military crises and that there will not be any major recoveries from such crises…in that case, you will not need any [trend following] investments in the portfolio. The [trend following]-strategy is a strategy that does well in a changing world. The changes may be positive or negative, but there needs to be extended movements in one or the other direction for [trend followers] to thrive….As a final and less research oriented reflection on the comparison between equity market performance and [trend following] performance, let me draw a parallel to rabbits and turtles (a famous group of [trend followers] were called ‘turtles’ as you may recall). Needless to say, rabbits are very quick over shorter distances. However, they are restless and often forget where they are heading. Most of the time, they stay above ground, but sometimes they go deep into the dirt. Turtles, on the other hand, are slower than rabbits over shorter distances, but they know where they are heading and keep moving in a very systematic and inexhaustible way. Turtles can get pretty old and can thus take advantage of their long experience. Over time they build and strengthen their shell, which–by the way–is the secret as to why they are able to travel long distances, not only on land in beautiful hot weather, but also when it starts to rain and when they need to swim through cold waters. The moral of the story is that one should never underestimate turtles. They have been around long enough to understand that investing is a marathon, not a sprint.

I substituted their use of the word CTA for trend following. Clearly, trend following is the dominant CTA style and that was the point of their comment. Plus, the word “commodity” is an artifact and misnomer. It’s the strategy, not the instrument.

Note: Shout to Alistair Evans for the find.

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