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Why Trend Following Works from Larry Swedroe

An excerpt from Larry Swedroe’s new piece about trend following:

[Trend following] performance was remarkably consistent over an extended time horizon, one that included the Great Depression, multiple recessions and expansions, multiple wars, stagflation, the global financial crisis of 2008, and periods of rising and falling interest rates.

[Trend following] annualized gross returns were 18.0% over the full period, with net returns (after fees) of 11.0%, higher than the return for equities but with approximately half the volatility (an annual standard deviation of 9.7%).

[Trend following] net returns were positive in every decade, with the lowest net return, at 4.1%, coming in the period beginning in 1919.

There was virtually no correlation to either stocks or bonds. Thus, the strategy provides a strong diversification benefit. After considering all costs and the 2/20 hedge fund fee, the Sharpe ratio was 0.76. Thus, even if future returns are not as strong, the diversification benefits would justify an allocation to the strategy.

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