The trend followers are really underperforming. I have to admire their stamina because if I suffered through a 60% drawdown like John Henry is in the middle of then i'd probably just admit defeat and return my investors money. Dunn is fighting back from a 50% drawdown. Eckhard bouncing back from a 30% drawdown. Why would you want to risk your money this way? Its worse than gambling. All of the big trend following guys are going through massive drawdowns at the moment, and those drawdowns started in 2004. So maybe they bounce back, but why is this a viable strategy/business? Many long/short funds that focus on value strategies barely had a drawdown even in a bear market. Convert arb had a disastrous year last year. In the past 12 months, the CSFB/Tremont Convert Arb hedge fund index is up 2.44%. Thats horrible. BUt its not a drawdown of 60%. Nor does it mean hedge funds are dead. Right now, whats working? Activism, PIPES, asset-backed lending, value-strategies. These strategies as a whole beat the markets and the hedge fund indices by double digits last year. Whats not working - most system strategies (particularly trendfollowing), arb is floundering but making a comeback, shortselling (most good long/short managers will admit they make no money on the short side - its a marketing gimmick). As for the question - why do I write books if I also run a hedge fund? I just enjoy it. And are long-only mutual funds doing trend following? No. Trend following is when you take, say, 30+ asset classes and try to figure out which assets are making extreme moves and you ride those moves. Most mutual funds play only one asset class. Fortunately it happens to be the best asset class of all over the past 100 years.
But there ARE a number of smaller systematic /trend following firms ($100+ aum) that are doing exceptionally well. Meyer cap in chicago and Mulvaney cap in london come to mind. Their performance has not suffered even as they have grown. Bad performance ala Henry, Dunn; i am no expert but is due to their size?
You make a great point - certainly their size has hurt them (although its helped their wallets by increasing their fees). Many of the commodities they attempt to trend follow have been historically illiquid and now have to deal with $50bb worth of trend following funds chasing them up. However, even the smaller funds have been hurt. Meyer Capital, which you mention, was down 1.3% in 2005. Mulvaney Capital, you are correct, was up 30% in 2005 but this seems to be the exception and not the rule. Checking out IASG.com, almost every trendfollower was down in 2005, some of them significant enough to put them out of business.
hey vishnu, wouldn't size help trend funds? bigger the size, and the more funds doing the strategy the stronger the trend since its being pushed by more money? what am i missing?? thanks, surfer
Hey surfer, that situation might help the trends, but not necessarily the funds' returns. They push the trend up (as a group), but they all also just top-ticked it! When the natural supply and demand fundamentals of the commodity kick in, the commodity then collapses.
thank you, vishnu. i imagine this is the underlying reason buying new highs, as taught in the "trend following" systems is a statistically inferior method. best, surfer
Its definitely never worked for stocks, even in a bull market. I can't find any system thats worked consistently on buying new highs and has worked over the low haul. Perhaps for some commodities its worked but with the amount of money going into trend following it doesnt really work for anything. Which is why all the trend followers are in their worst drawdowns ever.
Yes, I should not have said "all". However, some of the best known and famous ones out there: Henry, Dunn, Abraham, Superfund, etc are in large enough drawdowns to question the legitimacy of the entire trend following industry. People seem fascinated by the almost quasi-religious aspects of the trendfollowing philosophy without questioning if this is the best method for making money. Maybe it was at some point in the past (actually, it never was but lets leave that for a second) but it certainly isn't now. There are many strategies outperforming it and will continue to outperform it until the capacity for the strategy increases or until redemptions occur. Most importantly, most people on elitetrader seem to focus on stocks. The trend has never been your friend in the stock world. Mean reversion is your friend. Maybe 1999 Internet but even then, good luck holding through the summer drawdown. Most trend followers would get stopped out.