Trend Following Research

[Butterball]

Quote from marketsurfer:

What other reason would cause drawdowns of 40 plus percent? Maybe getting chopped to bits by multiple bad entries?

The only reason for a large drawdown you can come up with is a series of bad entries? That speaks volumes about the depth - or the lack thereof - of your alleged research and experience in the field.

The probability of a severe drawdown to occur - entirely independent of strategy - is directly related to leverage and margin to equity levels. The margin to equity or leverage ratio (and thus the implied volatility of returns) is a feature chosen at the discretion of the fund manager or trader; it is not strategy idiosyncratic.

 

[marketsurfer]

Quote from Butterball:

The only reason for a large drawdown you can come up with is a series of bad entries? That speaks volumes about the depth - or the lack thereof - of your alleged research and experience in the field.

The probability of a severe drawdown to occur - entirely independent of strategy - is directly related to leverage and margin to equity levels. The margin to equity or leverage ratio (and thus the implied volatility of returns) is a feature chosen at the discretion of the fund manager or trader; it is not strategy idiosyncratic.

Ok this makes sense. It could be one reason. So the manager or trader who experiences these large drawdowns is over leveraged? How do you know this is any more accurate than wide stops or multiple small cuts?

You are correct, I am not privy to the exact strategies used by every trend following fund-- however I do know that I would not want to be an investor in such a fund regardless of the reason of the large drawdowns.

 

[kut2k2]

Quote from Gabfly1:

Okay, that was inspired.

 

[kut2k2]

Quote from marketsurfer:

... Why does waiting for a trend to form prior to entry create any more of an edge than predicting when the past trend will change? Trends can change at any time, even the most fervent true believers would admit this-- therefore there really isn't any difference making the "trend following" hype a term used to market funds and other items without any edge or substance. It's really just buy and hope or sell and hope with wide stops across multiple asset classes. I look forward to your perspective as I have never seen the edge in investing in trend following. If you know it, aside from anecdotal legends. Do tell.... Thanks

Surf

The four principles of trend trading:

* Trade with the trend
* Let winnings run
* Cut losses short
* Manage risk

You talk about prediction as if it's easy and failproof. In real life, it's a helluva lot easier to detect something that exists (like current trend) than to predict something that has yet to exist (like when the "past" trend will change). I'm just amazed that you think it's easier the other way around.

Yes, trends can change at any time, which is why trading is a game of odds. Trend followers are playing the odds that an existing trend will continue long enough to reap a profit, as opposed to trying to predict when it will end so the "next" trend can be "ridden".

Anybody experiencing huge drawdowns isn't paying enough attention to the Cut-losses-short part and needs a better exit strategy. That's not an indictment of all Trend Following, just some trend followers.

 

[marketsurfer]

Quote from kut2k2:

".

Anybody experiencing huge drawdowns isn't paying enough attention to the Cut-losses-short part and needs a better exit strategy. That's not an indictment of all Trend Following, just some trend followers.

No doubt, but when the godfathers of this strategy have 40% plus drawdowns--- it's hard to imagine the average trader being able to successfully execute.

 

[Butterball]

Quote from marketsurfer:

No doubt, but when the godfathers of this strategy have 40% plus drawdowns--- it's hard to imagine the average trader being able to successfully execute.

Drawdowns are meaningless in assessing the viability of a strategy unless you take into account the amount of leverage employed.

You didn't do your homework here but you keep saying how well read and researched you are on the subject. You're clearly not.

As an exercise, why don't you take any random CTA and chart their historical monthly returns on one axis vs. their margin to equity ratios and see if there's a correlation.

 

[marketsurfer]

Quote from Butterball:

Drawdowns are meaningless in assessing the viability of a strategy unless you understand the amount of leverage employed.

You didn't do your homework here but you keep saying how well read and researched you are on the subject. You're clearly not.

As an exercise, why don't you take any random CTA and chart their historical monthly returns on one axis vs. their margin to equity ratios and see if there's a correlation.

Try telling this to your investor whom you recently placed in a big name trend fund that's down 40% in the first 3 months after investment. I don't think the investor will care why.

 

[Butterball]

Quote from marketsurfer:

Try telling this to your investor whom you recently placed in a big name trend fund that's down 40% in the first 3 months after investment. I don't think the investor will care why.

Then you're the one for not doing your home work. You're supposed to do your due diligence in your target fund and understand the level of leverage the fund typically carries.

There are trend funds (and other CTAs) that employ different levels of leverage to suit different investor risk appetites. Many of the big trend funds don't have anywhere close to the 40% historic drawdowns you're talking about simply because they employ more conservative margin to equity ratios. CTA drawdowns are typically not strategy idiosyncratic.

Why did this simple fact never occur to you? You claim you have a track record of placing money in hedge funds and working in the FoF industry, yet you are absolutely clueless about CTA margin to equity ratios. It feels like you have never heard of some of the things we're discussing here. Quite shocking to say the least.

 

[marketsurfer]

Quote from Butterball:

Then you're the one for not doing your home work. You're supposed to do your due diligence in your target fund and understand the level of leverage the fund typically carries.

There are trend funds (and other CTAs) that employ different levels of leverage to suit different investor risk appetites. Many of the big trend funds don't have anywhere close to the 40% historic drawdowns you're talking about simply because they employ more conservative margin to equity ratios. CTA drawdowns are not strategy idiosyncratic.

Why did this simple fact never occur to you? You claim you have a track record of "placing money in hedge funds" and working in the FoF industry, yet you are clueless about CTA margin to equity ratios. Quite shocking to say the least.

I'm not disagreeing with you butterballl. I don't work with trend funds but rather non equity correlated ( at least as far as that's true) niche strategy funds. Never did and wouldn't place a client with a CTA trend fund--- no edge there as far as I can determine.

 

[Butterball]

Quote from marketsurfer:

I don't work with trend funds

You admit to having no experience with trend following funds. You were intentionally misleading when you said you "studied all available publications" pertaining to trend funds as that was exposed as a blatant lie. The concept of margin to equity ratios as a measure of CTA trading risk is completely new to you.

In the future, at the very least you should refrain from passing off your opinion on trend following as verified fact.