Friday, April 18, 2014

How to consistently beat the market -- follow trends


Several people working for the hedge fund AQR Capital Management have a working paper which looks at trend following strategies over about a century. It finds they're generally very profitable, which is surprising, I guess, if you're an EMH nut and simply can't muster the imagination required to believe that markets contain identifiable momentum. From that paper:

As an investment style, trend-following has existed for a very long time. Some 200 years ago, the classical economist David Ricardo’s imperative to “cut short your losses” and “let your profits run on”suggests an attention to trends. A century later, the legendary trader Jesse Livermore stated explicitly that the “big money was not in the individual fluctuations but in... sizing up the entire market and its trend.”
 
The most basic trend-following strategy is time series momentum– going long markets with recent positive returns and shorting those with recent negative returns. Time series momentum has been profitable on average since 1985 for nearly all equity index futures, fixed income futures, commodity futures, and currency forwards.

The strategy explains the strong performance of Managed Futures funds from the late 1980s, when fund returns and index data first becomes available. This paper seeks to establish whether the strong performance of trend-following is a statistical fluke of the last few decades or a more robust phenomenon that exists over a wide range of economic conditions. Using historical data from a number of sources, we construct a time series momentum strategy all the way back to 1903 and find that the strategy has been consistently profitable throughout the past 110 years.
 
Now comes another study doing much the same kind of analysis, but going back as far as 200 years, and finding pretty much the same thing. Yes, trend following works, and it always has. No, the markets are not efficient. I've written a little more at Medium.

6 comments:

  1. This comment has been removed by the author.

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  2. The history of markets is not the issue. Trends certainly exist in hindsight. These professionals should now that. Hindsight is of no help. Trends are very hard to trade because of unknown risk. Take a look at this guy's articles for clues. He provides very good explanations, especially in the last one:

    http://www.priceactionlab.com/Blog/2014/04/passive-investing-fables/
    http://www.priceactionlab.com/Blog/2013/04/more-evidence-that-equity-index-trend-following-has-become-difficult/
    http://www.priceactionlab.com/Blog/2011/01/why-trend-following-is-hard-a-quantitative-answer/

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  3. I wanted to bring this to your attention which seems to contradict the results of the other papers:

    http://papers.ssrn.com/sol3/papers.cfm?abstract_id=2242795

    What do you think?

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  5. The most basic trend-following strategy is time series momentum– going long markets with recent positive returns and shorting those with recent negative returns. guaranteed personal loan without any risk factor and easy payment option.

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  6. A wonderful blog on the "How to consistently beat the market -- follow trends" thats amazing to read all about.thanks again.
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