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“We wish you a non-traditional New Year!”

Email in from a reader:

Hi Michael,

Thought you might like this from Man.

Have a great Christmas and keep up the good work.

Kind regards,
[Name]

Excerpts from Man piece:

The turn of the year is when traditional long only money managers state their predictions for the year ahead. Equity managers may be bullish if stocks are cheap or central bankers are expected to flood the markets with money, for example. Or they may be bearish if value is perceived the other way. It may not be an easy task, but the manager can generally make a guess based on a reasonably sound and intuitive argument. For a trend follower, however, it really is hard to answer the question in a manner that would satisfy most people.

The reason for this originates in how trend followers trade…trend followers are typically long when a market is rising and typically short when a market is falling. This is achieved through a systematic, non-discretionary process where computer algorithms analyse historic data in order to identify trends lasting anything from a few days to multiple months, with an average of around two months. Of course, individual markets may not trend all the time, so trend followers diversify by trading a wide variety of markets over many asset classes. The intention is that, as long as these markets are lowly correlated, the trend-following net is cast as wide as possible, and trends are captured wherever and whenever they occur. The technique is applied to the most liquid instruments available, meaning the strategy itself is highly liquid.

So trend followers do not care whether markets go up or down as they can potentially profit either way. Trend followers do not care which markets trend, as they typically trade a range of asset classes. Trend followers do care about persistence. As long as trends last at least a couple of months, the typical holding period of a medium term trend follower, we are generally happy.

Our prediction for the year ahead is therefore based on the persistence of market moves, and what can give us any confidence in that? Quite a lot, as it turns out. First of all, there is theoretical grounding for the existence of trends through the field of behavioural finance, or because of the varying speeds of dissemination of information into markets for example. Second, and perhaps more persuasively, there is evidence of trends existing in markets for hundreds of years1. So although it may be difficult to think why trends may persist in the year ahead, history and theory are with you.

The differences in how traditional versus trend-following managers have to think about the year ahead is a manifestation of the different yet complementary approaches both take. As you might expect, different approaches lead to different return profiles.

…trend followers are typically uncorrelated to equities (and other asset classes for that matter) because trend followers can be long when prices rise and they can be short when prices fall. What is also clear is that when the S&P has its worst calendar years, trend following returns have tended to be strong. It would seem that when equity markets are in crisis, trends can be strong and trend followers can be profitable.

If you have been inundated with predictions from traditional managers for 2016, spare a thought for us non-traditional managers. We find it hard to give explicit catalysts for performance in the year ahead, and as such are reluctant to give forecasts…Trend following offers an uncorrelated return stream to equities, and can even perform strongly when equities are in crisis. Trend following is perhaps considered a non-traditional strategy but on these grounds it may well be a welcome addition to traditional portfolios.

A happy reminder of the efficacy of trend following.

Michael Covel
Michael Covel

Ep. 408: The Force Awakens with Michael Covel on Trend Following Radio

The Force Awakens with Michael Covel on Trend Following Radio
The Force Awakens with Michael Covel on Trend Following Radio

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On today’s episode of Trend Following Radio Michael Covel starts off with a short clip from Star Wars. Michael notes that Yoda and the force have unexpected connections with trend following. He then recounts a story that happened to him a few weeks ago where he feels “the force” was involved. While he was waiting to take a red eye to Tokyo with his parents a man asked if he could share the power outlet he was using. That man happened to be one of the world’s most famous computing pioneers. Michael agreed to share the outlet if he could take a selfie with him. It was a weird serendipitous moment that Michael attached “the force.”

Michael goes on to read from an article titled, “Meet David Harding: The Man Behind Models that Beat the Market,” published in The Australian Financial Review. The article highlights Harding’s accomplishments and views on trading. Harding stresses in the article that the only reason systematic trading has gotten big over the years is because it works. Harding’s company, Winton Capital Management, goes completely against the efficient market hypothesis and he has actually made massive money going against the theory. David goes on to say that investment management is an internal psychological war with yourself. You constantly doubt yourself but the challenge is rising above that self doubt and sticking with your system. If you allow every emotion to be built into your system then you do not have a system at all.

“Over-fitting and It’s Impact on the Investor” by the Man AHL Academic Advisory Board is Michael’s next interest. Over-fitting is finding patterns that aren’t actually there. It is a common phenomenon in science as well as trading and other fields of study. Analyzing a companies culture is a good way to produce less over-fitting results. Michael quotes different view points regarding the concept of over-fitting, finishing up with inspirational quotes by NBA player Kevin Garnett and Christopher Hitchens focused on “making it happen.”

In this episode of Trend Following Radio:

“You can’t teach the beast, its either in you or it isn’t. you cant just go to the store and buy a six pack of beast.” – Kevin Garnett

“The reason the systematic investing community has gotten big is because it is successful. No one should miss that point.” – David Harding

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