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#172: Is the Trend Your Friend?

#172: Is the Trend Your Friend?

micksonmatch
November 05, 2024

S2N Spotlight

I have been working on a trend following strategy for the last month or so. I hope to have something live in a couple of weeks. I thought I would share how trend followers have done in comparison to the SP500 since 2000. If you look at the chart below the blue line is the trend following index of Societe Generale which tracks the 10 largest by AUM CTA’s. It appears on the chart to underperform the SP500.

However, if you have been following me for some time, you will know I always look at risk-adjusted returns. Focusing on top-line performance is like focusing on turnover and not worrying about profit and cash flow. I have highlighted in yellow the Sharpe Ratio, which shows Trend has easily outperformed the SP500 over the last 24 years.

One of the things trend followers have to accept is that they have a very poor win rate. Trend following is all about catching a wave that you ride all the way to shore. More on this in the coming weeks as I go into more detail of my strategy. In case you were wondering a win rate of 35% for a trend follower is pretty amazing.

S2N Screener Alerts

The only asset out of 100 that registered a daily Z Score up or down of 2 was Natural Gas. It was up more than 4%, but as you can see on the chart for the last 2 years, this is quite common, so nothing to get too excited about. I share for illustrative purposes, as you can see this is a very noisy signal.

Tesla registered a streak of 6 down days, the 19th time in 14 years of its history. It has been 196 days since we saw such a long streak.

Crude oil has a current rising streak of 4 days.

S2N Observations

A few days ago, I referenced this data but focused on only 1 year. I was asked what the underperformance looked like over longer periods. Let us focus on 10-years.

85% of US equity fund managers underperform their index. 90% of international equity managers underperform, and 81% of fixed income managers underperform their respective indexes.

I think it is important to be mature when confronting these numbers. This is not a statement about the impossibility of a select few managers to outperform the index over time. Clearly, we can see a small percentage of managers are able to do it. The problem is that it is easier to tell who the stars are after the fact. However, I believe the managers who have outperformed over say 5 years have a statistically higher probability of outperforming over the next 5 years than the general pool.