Swedroe: Why Trend-Following Works

November 17, 2017

An example is AQR’s Managed Futures Strategy (AQMRX), which has an expense ratio of 1.15%. The fund targets volatility of 10%. AQR also has a high-volatility version of the fund, QMHRX, which has an expense ratio of 1.58% and targets volatility of 15%. Thus, it’s slightly cheaper on a pro-rata basis. (Full disclosure: My firm, Buckingham Strategic Wealth, recommends AQR funds in constructing client portfolios.)

Additionally, AQR has found that in implementing time-series momentum strategies, their actual trading costs have been only about one-sixth of the study’s estimates used for much of the sample period (1880 through 1992), and approximately one-half of the estimates used for the more recent period (1993 through 2002).


As an investment style, trend-following has existed for a long time. The data from the research provides strong out-of-sample evidence beyond the substantial evidence that already existed in the literature. It also provides consistent, long-term evidence that trends have been pervasive features of global stock, bond, commodity and currency markets.

Addressing the issue of whether investors should expect trends to continue, the AQR researchers concluded: “The most likely candidates to explain why markets have tended to trend more often than not include investors’ behavioral biases, market frictions, hedging demands, and market interventions by central banks and governments. Such market interventions and hedging programs are still prevalent, and investors are likely to continue to suffer from the same behavioral biases that have influenced price behavior over the past century, setting the stage for trend-following investing going forward.”

The bottom line is that, given the diversification benefit and the downside (tail-risk) hedging properties, a moderate portfolio allocation to trend-following strategies merits consideration.

Note, however, that the generally high turnover of trend-following strategies renders them relatively tax inefficient. Thus, investors should strongly prefer to hold such strategies in tax-advantaged accounts.

Larry Swedroe is the director of research for The BAM Alliance, a community of more than 140 independent registered investment advisors throughout the country.

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