Trend Following Risk Premium: Will it Disappear? | Systematic Investor 278

Rob Carver returns to the show to discuss whether there is a risk that the Trend Following risk premium could one day disappear and how he manages exogenous and endogenous risks in a trend following system, how he thinks of trading single stocks instead of stock indices in a diversified multi-asset trend program and what the minimum lookback period would be, in order to be considered “long term”. We also discuss the irony of the newly approved crypto ETF, how the nature of bitcoin has changed and much more.
#toptraders #investing #trendfollowing
Episode Summary
00:23 - What has caught our attention recently?
10:14 - Industry performance update
11:26 - Q1, Norbert: What is the long-term expectation for the trend-following risk premium as measured by the SG Trend Index after costs and its stability or sustainability?
19:46 - Q2, Bruno: What is Rob's method for balancing endogenous and exogenous risk management and controls in a system
29:36 - Q3, Oliver: What is Rob's take on trading single stocks instead of stock indecies in a diversified multi-asset trend program
37:57 - Q4, Critter: What would the minimum lookback period be to be considered "long term"?
41:59 - Q5, Chris: Can you share a couple names of software companies that do robust backtesting of trade strategies
45:57 - Cypto ETFs have been approved!
52:42 - Allocating to bitcoin
01:04:31 - Looking into 2024
01:08:38 - Thanks for listening
Full episode can be found here:
toptradsersunplugged.com/si278
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[@mmm-cake]

👏🏼👏🏼

[@GAMERDOUP-qp3gt]

сколько эта схема будет работать по времени?

[@benchpress200]

I'm always surprised that trend followers prefer commodities futures over individual equities. Wouldn't individual stocks have a higher propensity to trend based on quarterly earnings report release? So what if they're highly correlated in aggregate, a random few companies will experience a meaningful breakout each quarter, up or down, that trend followers can capture. Plus there is long term upward drift for the whole market -- that's like an extra bonus positive carry for all your long positions.

[@duncansosso8010]

It’s done slightly differently in equities, i.e., momentum. It’s not just a different term to describe trend-following equities. It really is fundamentally a different approach. Classical trend-following (long and short) equities would have you go broke many times over in the last 20 something years. Do the backtests. Also, the importance of trading a diverse set of markets in trend-following futures CAN NOT be emphasized enough. Many will argue, rightfully so, that diversification is the sole reason that the strategy is profitable in the first place. The fact of the matter is that during bull markets stocks tend to all go up together. Sure, as you say, some will go up more than others, but they’re homogenous/correlated. Conversely, in bear markets almost all of them decline. You can’t rely on diversification to save you here, which is key to “absolute momentum” models. Furthermore, with limited capital, and minimal/no leverage, how do you decide which equities to apply your trend model to? These are cash instruments that you have to pay for upfront, more or less. Do you trade them all? Do you trade 50? If you trade 50, how do you decide which 50? What if the 50 you choose doesn’t include the one that rises 1000%? Get my point? There’s a better approach, it’s called “relative momentum,” or “dual-momentum.” You can apply the basic principles of absolute momentum/trend-following with a twist. Read the academic papers. Read AQR papers, it’s super interesting.

[@aniasat]

Thank you for the awesome comment

[@benchpress200]

@@duncansosso8010 Why is diversification so important if you trade long and short? Shouldn't matter to a trend follower if all stonks are falling together. It's only bad if everything just chops and doesn't trends. Picking which stonk to trade is not a problem specific to equities, it's a constraint that comes from size of your portfolio. If I'm a small retail trader I won't be able to trade 130 commodity markets anyway, I'll always need a way to rank and pick. Yes, I intend to do the backtest. You are probably right, since every single guest on this channel shares your opinion. I'm simply wondering about this dogma because I am new to this field.