Diversified Trend Trading Approach

Nice aggregation of stats of trend following funds... as of 2016...

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"When you look at performance in these clusters, you will find meaningful differences in return and risk. Overall, diversified trend is still the best strategy by return and information ratio on an equal weighted basis."

The difference in AUM between long term and short term is ..... very large.

http://www.amphitrading.com/last/?p=40

Insight into Transtrend research.

In our July 2016 newsletter we wrote about the non-linear and non-symmetric behavior of markets. We illustrated how ignoring these market characteristics can result in the underestimation of portfolio risks.

Interesting thought from Mr. Rzepczynski...

A limited set of markets - The gains from diversification are asymptotic. As the number of markets increase, the marginal gain from further diversification moves to zero; consequently, the number of markets that should be included in a benchmark should be adequate to provide the maximum diversification but limited so as to minimize transaction costs.

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from

http://mrzepczynski.blogspot.com/201...following.html

Now what is the optimal number of markets/strategies to achieve maximum benefit of diversification? How to calculate it?

Jerry Parker says he has over 100 and also in some trend following podcasts I hears also over 150 markets mentioned.

Nice post R. Indeed there is significant style drift in the CTA's and why you need to be very careful in making a broad assumption that all CTA's are the same.



Of the 54 fund I track on IASG's database, the majority of successful funds that have a long term track record are diversified trend followers. I have attached a spreadsheet that details the characteristics of the funds included in the TF Index. Approximately 32 of the 54 are classic diversified trend following funds with the balance being trend following with a pinch of mean reversion. It is worthwhile getting familiar with the fund characteristics and what leads to style drift in their performance characteristics. Use the filters in the spreadsheet to rank the list and it brings out interesting conclusions.

For this list that I compiled to create the TF Index, these were not cherry picked but simply selected from the long term successful CTA's that had a track record since 1 Jan 2000 to today. A large number of CTA's have died over the period...but the survivors tell a story of their own....and give valid reasons for why they have survived against a wide range of market conditions. For inclusion into the TF Index: The funds had to demonstrate a long term track record - This removed a significant number of >400 funds from the IASG database.....and of those remaining about 60%-70% were classic diversified trend followers. This demonstrates the power of this particular class of investment style despite their volatile return profile.

Not surprising was that the funds offering higher risk weighted returns were found to comprise those programs offering both divergent (TF) and convergent styles (CT).....which is why we are starting to dabble in systematic blends of both TF/Momentum and also Mean reversion to achieve higher risk weighted returns......however it is essential to note that we need to retain positive skew overall.

Note that of the 54 funds in total (which were not cherry picked) but simply the long term survivors..... 50 of them had positive skew with only 4 of them having weak negative skew.....of which 3 of the 4 were poor performers. The key to survivability is positive skew.

Every one of the 54 funds had low correlation to the S&P500 TR Index which is testament to their diversified nature across asset classes and why this style of fund is very attractive to the portfolio allocators looking to hedge their classic 60:40 equity/bond exposure.

Do not be lured towards those strategies with high MAR/Sharpe/Sortino ratio's over a short term time-frame. This is what makes convergent strategies so appealing. This is why I like to use the entire data set in my risk management assessment as opposed to a sample extract. It is only over the long term horizon that you can see the chink in the armor of convergent styles such as mean reversion.

So in a nutshell this demonstrates:
1. That diversification is essential to manage risk exposure and lead to long term sustainability;
2. That positive skew for the portfolio is essential as the higher win rate of negative skew is an illusion and can lead to account blowups when markets decide to throw a tantrum;
3. That system blending using divergent and convergent styles leads to higher risk weighted returns provided that divergent styles still dominate the blend;
4 That over the long term a preference is towards divergent trading styles as opposed to convergent trading styles.

Cheers

C

IMO the assumptions made are a bit deficient as they exclude important aspects of risk management from the assessment and myopically look at performance returns and the impact of transaction costs. Jerry P and many other long term successful funds IMO have got it right in that you can never be too diversified provided that the composite return distributions are not identical in nature and provide some correlation offset.

Andreas Clenow's interview in written form

http://www.donttalkaboutyourstocks.c...ndreas-clenow/

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From Andreas' website:

What are CFDs? by Andreas Clenow

Andreas Clenow's interview on obscure site:

https://martinkronicle.com/trend-mom...xpert-andreas/

Something happened in oil on second Christmas day:

I opine is the explosion/blow up of a pipeline in libya that reduces supply into the oil market by 70k bpd

One can look for answers for fun why move happened. But such information doesn't help to know how much to buy and when to exit.

Time to flush out the speakers and begin the warm up for the New Years Eve bash :-)

Zero value of forecasters and financial authorities in predicting:









from Andrew Abraham, David Druz, "The Trend Following Bible: How Professional Traders Compound Wealth and Manage Risk"

Orderly trend in Orange Juice.... too bad I noticed it today....

Unfortunately, that is left for you/the trader to decide.

Orderly trend on silver. Short SDC 0.5 already:

Again the monkeys, this time from Winton



https://www.winton.com/research/the-global-monkey