"Jim Simons is Correct About Trend-Following"

carrer · Sep 23, 2015

Buy1Sell2 said:
FALSE

And why is that?
---------------------
October 9, 2007 to March 9, 2009
Nasdaq = -54.9%
S&P 500 = -56.6%
Dow Jones = -53.9%

Based on the article, if one use a leverage of 1:2, bought-and-hold, he would get a margin call.

carrer · Sep 23, 2015

If the trend following system (50-200) were to be adjusted to have the same level of drawdown of buy-and-hold by increasing the leverage, it will definitely outperform the buy-and-hold strategy.

globalarbtrader · Sep 23, 2015

R1234 said:
Simons is correct. Trend following is a challenged space at present. Doesn't mean it will always be that way. I don't think there's some permanent structural change that has arbed away trends forever. It's mainly due to the deflationary environment and uncharted central bank policies. Back in the in 90's when I was in the trend following CTA biz our core money makers were the financials - the currencies, sovereign bonds and STIRs. Well, from about mid 2010 to mid 2014 currency trend following became highly erratic due to many cross currents across the world (starting with the taper tantrum). Sovereign bonds, similar story. However both of those asset classes have been showing signs of gradually phasing back to trendiness. STIRS were a core part of many CTA portfolios back in the day (eurodollar, euroyen, euribor, sh.sterling, etc..) given their great tendency for low noise trends. But the global zero rate policies effectively made all those instruments flat line. The state of the world will return to normal some point in the future and diversified trend following will be back in vogue.

Yes CTA's had a flat spot between 2010 - 2013 (last year was great though), but that wouldn't be unexpected just given statistical noise; I'm not sure it means that TF is broken.

Also don't forget Simons said that TF was broken in 1980, not 2010!

R1234 said:
The smart diversified CTAs who have survived and thrived through the past 5 years are not just trend following. I bet they have a large mean reversion component on worldwide stock indices. Also there has been a movement away from the traditional fixed sector allocations that were used in the past (eg. 25% stock trend, 25% bond trend, 25% commodity trend, 25% currency trend). Now people are using adaptive allocations - shift weights to those systems that are working, whether it a trend system on soybeans or a countertrend system on copper or a cross asset system on bund.

AFAIK they wouldn't have a big mean reversion component. The main reason being their investors wouldn't like to see any evidence of style drift.

Also adaptive allocations are very difficult to get them to work - it's almost impossible to find evidence of predictability for different trading systems. Again I'd be surprised if anyone sensible was doing this, or at least in a big enough way to affect their returns.

I'm working on a much longer response to the original article, which I'll post on my blog in due course.

GAT (used to work in a large CTA until a couple of years ago)

globalarbtrader · Sep 23, 2015

As promised here is a more detailed rebuttal: http://qoppac.blogspot.co.uk/2015/09/sorry-jim-trend-following-probably.html

Buy1Sell2 · Sep 23, 2015

carrer said:
And why is that?
---------------------
October 9, 2007 to March 9, 2009
Nasdaq = -54.9%
S&P 500 = -56.6%
Dow Jones = -53.9%

Based on the article, if one use a leverage of 1:2, bought-and-hold, he would get a margin call.

It's because it takes much less than 1 to 1 leverage to crash a buy and holder.

carrer · Sep 23, 2015

Buy1Sell2 said:
It's because it takes much less than 1 to 1 leverage to crash a buy and holder.

In the context of index futures, yes, I do agree.

Buy1Sell2 · Sep 24, 2015

carrer said:
In the context of index futures, yes, I do agree.

WITHOUT MERIT
--Leverage is leverage regardless of whether your speaking of futures or cash. The fact remains that a buy and hold trader will get crushed with less than 1 to 1 leverage---it doesn't have to be 2 or 3 to 1.

Buy1Sell2 · Sep 24, 2015

R1234 said:
Trend following is a challenged space at present.

?

carrer · Sep 24, 2015

Buy1Sell2 said:
WITHOUT MERIT
--Leverage is leverage regardless of whether your speaking of futures or cash. The fact remains that a buy and hold trader will get crushed with less than 1 to 1 leverage---it doesn't have to be 2 or 3 to 1.

Index futures are leveraged by default.

Take the equity market as an example, which no leverage is being used.
A stock trading at $100, if the price depreciate by 50%, you will only lose 50% (assuming that you have invested all your capital in this particular stock).

nonlinear5 · Sep 25, 2015

carrer said:
Index futures are leveraged by default.

Take the equity market as an example, which no leverage is being used.
A stock trading at $100, if the price depreciate by 50%, you will only lose 50% (assuming that you have invested all your capital in this particular stock).

You can trade futures in such a way that your leverage is 1:1 (i.e. no leverage). It's all about position sizing. For example, if your account is 100k, and you trade a single ES future contract, the risk/reward/leverage would be roughly the same as trading the underlying stock index SPY with entire capital. In fact, you can deleverage your future trading to the point where it's less than 1:1.