AQR Hedge Fund moving into Trend Following

[JezLiberty]

Quote from BPtrader:

why did it take them so long to find "trend following"?

were they busy doing a ponzi?

I think they were more into momentum investing originally, then tried to tap the retail market with mutual funds, now they are attacking another part of the market. I am not sure they care so much about absolute returns - rather about their fees, which they can increase if they beat the relevant banchmark (ie, in momentum investing or in trend following now, etc.)

Not sure if good ol' Cliff is 100% invested in hiw own fund...

 

[JezLiberty]

Quote from Rodney King:

'In some seasons, trend following is good; in others, reversing is good. The problem is how to differentiate the two seasons in advance.' -- Vic Niederhoffer, 'Education of a Speculator', pg 98

Is that the same Niederhoffer that blew up in 1997 and in 2007? (and in 2017?..)

I think Trend Following recognizes that you cant predict (which period will be range-bound vs which period will be trending) and adapt by developing a startegy that will "survive" in range-bound periods and "flourish" in trending periods.

If you try to be too clever, you just blow up when adverse periods come!

 

[makloda]

Niederhoffer embraced the idea that he had an impeccable edge in determining when a certain market went down/up "too far" and then tried fading the move. This worked great 99 out of 100 times, unfortunately every once in a while shorting volatility turns into a terrible "deer in the headlight" event that chops off one's greedy little fingers before they can pick up the last couple of nickels.

Ironically, Niederhoffer was feasting on the mediocre performance of trendfollowing funds in 2004 and 2005, proclaiming that they were "dead" and "made obsolete". His highly arrogant posts and articles from this period are still available on the net and I highly recommend them. Then, Niederhoffer lost 70% in 2007 in another leveraged mean-reversion bet. The trendfollowing funds that Niederhoffer ripped five years ago are still here today. All of them.

 

[Daal]

Quote from makloda:


Ironically, Niederhoffer was feasting on the mediocre performance of trendfollowing funds in 2004 and 2005, proclaiming that they were "dead" and "made obsolete". His highly arrogant posts and articles from this period are still available on the net and I highly recommend them. Then, Niederhoffer lost 70% in 2007 in another leveraged mean-reversion bet. The trendfollowing funds that Niederhoffer ripped five years ago are still here today. All of them.

The fact that the funds are still here and VN isn't is not significant evidence that TL works or that mean reversion doesnt work. This is the same small sampling type argument michael covel makes in his flawled book 'Trendfollowing'

 

[makloda]

Nowhere did I say mean reversion "doesn't work". Also, I didn't try to make a scientific argument - simply stating the irony market history can offer in hindsight.

 

[JezLiberty]

Quote from makloda:

Niederhoffer embraced the idea that he had an impeccable edge in determining when a certain market went down/up "too far" and then tried fading the move. This worked great 99 out of 100 times, unfortunately every once in a while shorting volatility turns into a terrible "deer in the headlight" event that chops off one's greedy little fingers before they can pick up the last couple of nickels.

Ironically, Niederhoffer was feasting on the mediocre performance of trendfollowing funds in 2004 and 2005, proclaiming that they were "dead" and "made obsolete". His highly arrogant posts and articles from this period are still available on the net and I highly recommend them. Then, Niederhoffer lost 70% in 2007 in another leveraged mean-reversion bet. The trendfollowing funds that Niederhoffer ripped five years ago are still here today. All of them.

Thanks makloda, exactly my point

The probem is that people have a short/selective memory...

And many still hold the old Vic as a master trader...

There are many other examples, look at LTCM.. And John Meriwhether is opening his new fund after blowing up the one he set up after LTCM!


@Daal
I dont really want to get into an endless debate on this TF v MR, but I believe the examples are here to illustrate the theories/concepts behind it (and not the other way around):
- risk of ruin is increased by leverage/optimization of results (which is what mean reversion typically is about)
- markets exhibit fat-tail events and if you trade against them, you increase your risk of ruin, hence it makes sense to use a strategy that benefits from them (read Trend Following)
- you cannot predict...

A book that is much better than Trend Following to illustrate some of these points, imho, is The (mis)behavior of the markets by Mandelbrot. It is also very entertaining to read (I think it is better than Taleb's Black Swan and definitely much less arrogant - if any!)


All that being said, I believe from a pure business point of view, it might make more sense to set up a fund similar to Niederhoffer, LTCM, etc:
- your strategy makes people think you are very clever and can identify inefficienc
- people forget quickly about blow-ups
- your performance until you blow up will be much more impressive than TF funds, bringing lots of forgetful clients, bringing more AUM, and bringing in even more fees (both based on performance incentives and more AUM).

Now, if we talk about business ethics, long-term client relationship, it might make more sense to use a strategy that will ensure decent return and survival over the long term (read Trend Following)...

 

[Daal]

Quote from JezLiberty:

- markets exhibit fat-tail events and if you trade against them, you increase your risk of ruin, hence it makes sense to use a strategy that benefits from them (read Trend Following)
- you cannot predict...

TF claim a uptick/downtick is more likely to be followed by another uptick/downtick. This defies economic theory where higher prices bring about supply and decrease demand and lower prices create demand and decrease supply, if markets werent mean reverting by nature, that is if they were more or less random but with a bias of going to whichever direction they recently headed you would have absolute gigantic mispricings(like a stock market with a normalized PE of 1000). The reason that doesnt happen is because economics kicks in and prices mean revert

Now you might claim you can capture the 'middle' moves with a system that worked historically, and perhaps that is true, whether it will keep working who knows, but the TF claim that higher/lower prices are more likely to be followed by higher/lower prices is not correct most of the time

 

[makloda]

Quote from Daal:

TF claim a uptick/downtick is more likely to be followed by another uptick/downtick.

[...]

but the TF claim that higher/lower prices are more likely to be followed by higher/lower prices is not correct most of the time

The classic misunderstanding between probability and expectancy of an outcome.

Quote from Daal:

prices mean revert

True, except when they don't. And that's when trend followers clean up.

 

[Daal]

Quote from makloda:

The classic misunderstanding between probability and expectancy of an outcome.

Tell that to the folks who make that claim. Also, I'd say when you have economics working against you, it doesnt really help the expectancy case, now maybe one can overcome bad odds by having these great super TF systems that worked in the past(which some claim will never stop working) but the burden is on them to explain these silly claims like 'buy whats going up, more often than not it will work'

 

[makloda]

Quote from Daal:

the burden is on them to explain these silly claims like 'buy whats going up, more often than not it will work'

Nobody is saying that, you mix it up once again. No trendfollower will ever say "Buy what's going up because you will then have a higher percentage of winning trades than losing trades". I find it strange this argument keeps coming up, yet nobody in trendfollowing is ever claiming it.

Economic theories of higher (lower) prices generating more (less) supply do not contradict the profitability of long-term trend following, in fact trendfollowers can profit from long-term economic up and down cycles in commodity markets. How long does it take for new oil fields, copper mines or soy bean plantations to come to the market after prices went up 200%? 1 years? 3 years? More than enough time to ride a trend up and then back down again.