I’ve always been very skeptical of trend following. Marketers claim that trend following hedges a multitude of risks (inflation, geopolitics, recession etc), while simultaneously offering strong returns and having virtually unlimited capacity.
Conveniently ignoring the fact that BTOP50 (a trend following index) has seen its cumulative 10 year returns decay by >60-70% since the early 2000’s, coinciding with the 10x increase in trend following AUM products (which doesn’t even include trend exposure in non-trend centered products!)
If trend following truly hedges risk, who are the counterparties consciously accepting more risk for less return? Since trend followers seem to struggle to answer that question, and since trend following is so widely known, I would expect trend following to continue to offer poor returns relative to the past as capital chases the same signals. In fact, I can imagine a world where investors consciously and willingly accept persistent negative returns so long as trend following is capable of hedging the risks they care about.
