When Does Trend Following “Kick In?”

The first quarter of 2020 was very difficult for most risky asset classes, and managed futures funds delivered mixed returns while equities drew down more than 20%. The increasing popularity of terms such as “crisis alpha” and “crisis risk offset” may have exacerbated confusion as to how managed futures may be beneficial during market downturns, leading some investors to think of managed futures as an equity market hedge.

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In this note, we will show that trend-following becomes increasingly negatively correlated to equities as the observation window lengthens (i.e. daily, monthly, quarterly) and that trend-following exhibits the strongest convexity (defined later) to equities at the quarterly horizon. This underlines what we have been saying for many years: managed futures are not a hedge, per se, but may provide some downside risk mitigation during equity bear markets, when they often (but not always) experience positive returns.

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