A systematic strategy that buys assets exhibiting upward price momentum and sells (or shorts) assets in downtrends, across a diversified universe of futures markets (equity indices, bonds, commodities, currencies). Generates crisis alpha by naturally becoming short equities during sustained equity bear markets.
Rules are fully defined before execution: lookback period(s) for trend signal, universe of markets, position sizing (typically volatility-targeted), rebalance frequency. The strategy is diversified across 20–80 markets and multiple timeframes to avoid concentration. Entry/exit decisions are mechanical — no discretion allowed. Risk is managed via position-level volatility targeting, not stop-losses.
Trend following is marketed as "crisis alpha" and portfolio protection — but it only provides protection during prolonged bear markets (months of sustained decline). For flash crashes and short sharp corrections (COVID 2020, February 2018), trend following provides minimal protection because there is no sustained trend to follow. Practitioners who rely on it for all tail events are wrong about half the time.
After every painful drawdown, CTA managers add filters to prevent that specific scenario from occurring again. Each filter looks logical in isolation. But adding post-hoc filters after drawdowns systematically introduces degrees-of-freedom costs (overfitting to the recent past) and degrades long-run robustness. The empirical record of successful CTAs shows they run simpler, more diversified programs — not more filtered ones.
Standard CTA markets (100-125 equity indices, bonds, currencies, commodities) have become crowded to the point where the trend signal itself has compressed alpha. Alternative markets (emerging market rates, electricity, agricultural, carbon credits) have lower speculator/hedger ratios and are driven more by real economic flows — resulting in better directional persistence and less competition for the signal.
The structural reason trend-following persists for decades is that physical hedgers (commodity producers, currency hedgers) systematically take the other side, providing the "losing" counterparty that funds the premium. This is not a statistical anomaly that can be arbitraged away — it is an economic function (insurance provision) with a permanent counterparty.