Trend-Following Investing: Evidence, Crisis Alpha, and Portfolio Diversification

Trend-following — the systematic strategy of buying assets in uptrends and selling or shorting assets in downtrends — is one of the oldest quantitative investment approaches, with documented roots in commodity futures markets dating back well over a century. It is distinct from momentum investing (which is cross-sectional and compares relative strength between assets), and it is distinct from discretionary macro investing (which relies on fundamental analysis). Understanding what trend-following is, what the evidence shows, and why it belongs in sophisticated portfolio construction is the focus of this guide.

What Trend-Following Actually Is

Trend-following, also known as time-series momentum, is a strategy that takes long or short positions in individual markets based solely on the direction and persistence of price movements in those markets over look-back periods typically ranging from 1 to 12 months.

A simple implementation: if the 12-month price return of WTI crude oil futures is positive, go long crude oil. If it is negative, go short (or flat). Apply the same rule to equity index futures, bond futures, currency forwards, metals, and agricultural commodities. Adjust position sizes based on the volatility of each market (so that a volatile gold market does not swamp returns from a steady bond position). Rebalance monthly.

The strategy's returns come from two sources: the price trend itself (capital appreciation from correctly positioned futures contracts) and the roll yield of the futures positions. It has no fundamental component: the strategy does not care what the "correct" price for crude oil or US Treasuries is, only which direction prices have been trending.

Managed futures funds run by commodity trading advisers (CTAs) are the primary institutional vehicle for trend-following strategies. The SG CTA Index, which tracks the performance of the largest CTA funds equally weighted, provides the best available long-run benchmark.

The Evidence: 100 Years of Trend-Following

Hurst, Ooi, and Pedersen's 2017 study "A Century of Evidence on Trend-Following Investing" examined simulated trend-following strategies across 67 markets and four asset classes (equities, bonds, currencies, commodities) going back to 1880. The findings were striking: trend-following strategies delivered strong, positive Sharpe ratios in nearly every decade examined, consistently across multiple asset classes and geographies.

More pertinently, the strategy delivered positive returns during the vast majority of the major equity bear markets in the sample — including the Great Depression, the 1973–74 oil shock, the 1987 crash, the 2000–02 dotcom bear market, and the 2008 global financial crisis. During periods when equity markets fell 20% or more, trend-following strategies were, on average, significantly positive.

This is the property known as "crisis alpha": the empirical tendency of trend-following strategies to generate positive returns during the acute phases of financial crises, precisely when traditional long-only equity and credit portfolios are experiencing their worst drawdowns. The reason is straightforward: large market dislocations typically unfold over months rather than days, and trend-following strategies position themselves in the direction of the prevailing trend — which, in a bear market, means short equities, long bonds (the flight-to-safety trade), and long defensive commodities such as gold.

Momentum Crash Risk

Trend-following is not without meaningful risks. The most significant is momentum crash risk — the sharp and sudden reversal that occurs when a trending market abruptly reverses direction.

The most dramatic example is the CTA drawdown of 2009. Having correctly identified the equity bear market of 2008 and profited from it (the SG CTA Index was up approximately 13% in 2008), trend-following strategies entered 2009 short equities. When markets bottomed in March 2009 and began a sharp, rapid recovery, trend-following strategies — still positioned for the downtrend — incurred severe losses. The SG CTA Index fell approximately 8–10% in 2009, wiping out a portion of the 2008 gains.

Similarly, after the brief COVID-19 crash of February–March 2020, markets recovered with extraordinary speed. Trend-following strategies that had correctly sold equities on the way down found themselves whipsawed by the rapid reversal.

The "crash" in momentum happens at turning points, and turning points are, by definition, unpredictable. This is not a flaw in the strategy so much as an inherent characteristic: a strategy designed to follow trends will suffer when trends abruptly reverse.

Time-Series vs Cross-Sectional Momentum

It is important to distinguish between time-series momentum (trend-following) and cross-sectional momentum (the standard equity momentum factor):

Time-series momentum evaluates each asset against its own historical price path. An asset is long if its recent return is positive; short if negative. This is the approach used by managed futures / CTAs and can take both long and short positions.

Cross-sectional momentum ranks assets against each other. Buy the top decile of recent performers relative to the peer group; sell or short the bottom decile. This is the equity momentum factor documented by Jegadeesh and Titman (1993), which operates within a universe of equities with no reference to absolute direction.

The two strategies are related but distinct. Cross-sectional equity momentum suffers from momentum crashes during bear market reversals (as documented by Daniel and Moskowitz in 2016). Time-series momentum (managed futures) has a more favourable relationship with equity bear markets because it can take outright short positions.

How Trend-Following Diversifies a Traditional Portfolio

The most compelling argument for including trend-following in a sophisticated portfolio is its correlation structure. Managed futures strategies have, historically, exhibited near-zero or even mildly negative correlation to equity markets over full market cycles, rising to meaningfully negative correlation during acute equity stress events — the precise periods when portfolio diversification is most needed.

In a standard 60/40 portfolio, bonds are expected to provide defensive characteristics during equity bear markets. This assumption held well for most of the 2000s and 2010s, when falling interest rates supported bond prices during risk-off episodes. However, 2022 demonstrated that when inflation is the driver of market stress, bonds and equities can fall simultaneously — as they did in one of the worst 60/40 calendar years on record. Trend-following strategies, which can go short bonds as well as equities, performed strongly during the 2022 sell-off (the SG CTA Index delivered approximately +20% in 2022 — its best year since the index began in 2000, with the more concentrated SG Trend Index up around +27%), providing exactly the diversification that bonds failed to provide.

This illustrates why trend-following is described as a genuine diversifier rather than merely a low-correlation alternative: it tends to deliver its strongest returns in precisely the scenarios where traditional portfolios suffer most.

Implementation: UCITS Liquid Alternatives

For retail and professional investors outside the traditional institutional CTA route, managed futures strategies are accessible through UCITS funds (which comply with European fund regulation and are available across the EU/UK market):

iMGP DBi Managed Futures UCITS ETF: replicates CTA exposure efficiently using a liquid factor approach.

Man AHL Diversified UCITS Fund: one of the largest UCITS-compliant managed futures funds, managed by Man AHL, one of the most established CTA managers.

Winton Trend Fund: UCITS-compliant fund from Winton Group, a leading systematic investment manager.

AQR Managed Futures UCITS: academic-quality implementation from AQR Capital Management.

Ongoing charges for managed futures UCITS funds are typically 0.75–1.50% annually for institutional share classes. The additional cost relative to passive equity ETFs is the price of the crisis alpha characteristic.

A typical strategic allocation within a diversified portfolio is 5–15% to trend-following or managed futures, sized to provide meaningful diversification without overly diluting the core equity growth engine.

Compliance and Regulatory Note

Managed futures and trend-following strategies can deliver significant losses during periods of trend reversal. Past positive performance during equity bear markets does not guarantee similar performance in future drawdowns. These strategies involve the use of derivatives and may use leverage, increasing the potential for loss. UCITS funds are regulated investment vehicles but carry market, counterparty, and liquidity risks. This article is for information only and does not constitute personal financial advice. Seek qualified professional advice before investing.

How Global Investments Can Help

Managed futures and trend-following allocations are best thought of as portfolio insurance with an expected positive long-run return — unusual among insurance-like instruments. Whether this type of exposure is appropriate for a given investor depends on time horizon, overall portfolio construction, and the investor's ability to hold through periods of underperformance against simple equity benchmarks. At Global Investments, we assess each client's overall portfolio architecture before recommending alternative strategy allocations, ensuring any addition genuinely improves risk-adjusted outcomes rather than adding complexity for its own sake. Contact our team to discuss systematic alternative strategies within your broader investment framework.