Althucher guesses: trend funds to disappear within the next 10 years...

dealer · Apr 3, 2006

I think we have come back to the issue that size really does matter......

I would also add that timeframe is critical.

marketsurfer · Apr 3, 2006

Quote from ananda:

Use the evidence I have provided. It is a question of fact, not cult belief.
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you provided anecdotal evidence--which means nothing primarily due to survivorship bias and the effects of randomness. if you can show me statistical evidence of trend following working in any time frame, my hats off to you.

best,

surfer

bubbrubb · Apr 3, 2006

might want to check out the whitepaper, "Does trendfollowing work on stocks?"

can be downloaded here:

http://turtletrader.com/blackstar-funds.html

bubbrubb · Apr 3, 2006

ps. also might want to check out all the articles on merriman capital managements website that discuss trendfollowing vs buy and hold for a number of asset classes.

www.fundadvice.com
âWhich is Better, Buy and Hold or Market Timing?â, February 13, 1998
âDesigning a Market Timing System to Maximize the Probability it Will Workâ, Dec 20 1999
âThe Best Retirement Portfolio We Knowâ, February 15, 2001
âAll About Market Timingâ, April 20, 2001
âThe Best Retirement Strategy I Know Using Active Risk Managementâ, March 27, 2002
âMarket Timingâs Bad Rapâ, Paul Merriman, July 22, 2002

bubbrubb · Apr 3, 2006

pps. if i were to invest in managed futures trendfollowing, i would use the mt lucas index. i bet it beats most of the managers. . .

if you look at some of the academic papers on the subject, the majority of the returns come from the collateral yield. . .that point is often overlooked, and always understated. . .

cant remember the papers name but think it was by some folks at EDHEC. . .

marketsurfer · Apr 3, 2006

Quote from bubbrubb:

might want to check out the whitepaper, "Does trendfollowing work on stocks?"

can be downloaded here:

http://turtletrader.com/blackstar-funds.html
More...

i commented on that paper earlier. it seems like a sales pitch veiled in academic lingo to me. vishnu--can you comment?

thanks,

surfer

bubbrubb · Apr 3, 2006

ppps mt lucas paper here

http://www.edhec-risk.com/site_edhecrisk/public/edhec_publications/RISKReview.2005-02-02.1924

marketsurfer · Apr 3, 2006

thanks, bubb. i'll take a look at the research.

surfer

Maverick74 · Apr 3, 2006

Quote from Vishnu:

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.

I really have a lot problems with this post. Let me try to address each of these. First of all, for a guy that has published a book, I am somewhat taken back by the lack of quality research that has been used to back up the author's assertion. Perhaps he has provided such anecdotal evidence in his book, but I was optimistic that such evidence would be provided on this thread.

Let's start with this first statement, that trend followers are underperforming. Now I am making the assumption here he is referring to the market in general. If this is the case, then let me add that almost all hedge funds right now are underperforming across all categories.

The author then cites a few of the more well known trend followers Henry, Dunn and Eckhardt. Wow, in a universe of hundreds of trend following funds, he names 3. That's not going to do it for me. What the author is leaving out, is between just those three names alone, they have collectively made over 20 billion dollars in trading profits the last 10 years. That is a lot of money folks. Then the author makes a completely erroneous statement by saying, these funds are worse then gambling. Yet I bet the author can't name one gambler who has made a billion in profits, nonetheless 10 billion. But I will let the author try.

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.

And the absurd statements continue. While his statement is materially accurate, that many trend following funds are going through some heavy drawdowns, many of them are not. Many are trading at or near all time highs. Why is this a viable business strategy? I assume this was the author's attempt at a very poor joke. I will say this again, the three names mentioned earlier collectively made over 10 billion dollars the last decade. Perhaps closer to 25 billion. That's more money then what 98% of the companies in the SP 500 make in a year. And the author is questioning the veracity of the business model?

Then he follows with the comparison of long/short equity funds. Seriously, if this research were ever presented at a major university, it would be dismissed as malarkey.

Most long/short equity funds have dismal historical records. The best in the group strive to make 10% to 15% returns, most fall short of that. Of course with these lower returns comes lower volatility. However you simply cannot with a straight face make the comparison to trend funds that have up years where they make 50% to 80%. You simply cannot do it. You are comparing apples to oranges.

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.

Another poor comparison. These funds have totally different structures. Their down years are miniscule, but so are their up years. And they have the added kicker of not only earning small returns but always carry the blowup card with one bad spread goes the wrong. Wow, you get all the downside with none of the upside. No thanks.

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.

OK, this statement should completely discredit his book entirely. The author is writing a book condemning a strategy that has been viable for the last 100 years and then follows that up with the "what's hot now" spiel. Wow, so I should remove my money from a strategy that has worked for 100 years in favor of one that is hot right now and will probably not be so hot 12 months from now? Wow, OK. One could argue, that this is itself a "trendy" approach to trading.

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).

Now we get the marketing pitch about what's not working. Gee, thanks. So what he is saying is, because these strategies don't represent what perhaps Jesus H. Christ could do if he ran a hedge fund, i.e. never have a drawdown, you should dismiss any strategy that has a period of underperformance. Wow, someone should tell those guys that follow the "Dogs of the Dow" strategy and tell them to return all the money they made over the years.

As for the question - why do I write books if I also run a hedge fund? I just enjoy it.

I wish you provided more factual information from the book on this thread.

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.

Yes, they are. They are just choosing to follow up trends. I know many trend following funds that refuse to take short positions. The justification for doing this is that commodities really can't go to zero. Most products tend to trend much better on the upside because they can "keep" going. Mutual funds follow the same path. One can argue that stocks are only one asset and therefore don't follow the mantra of following 30 to 50 different products. To this I would argue that mutual funds actually invest in hundreds of products called individual stocks and they are trend following by it's very definition. The fact that the author chooses to create his own definition of what consists of trend following does not make it so.

Let me close with this. Every strategy in the world has it's pros and cons. I have argued ad infinitum about the merits on long gamma vs short gamma option strategies. Where long gamma traders bleed in many cases every month only to have big home runs one or twice a year that make their numbers. On the other hand, short gamma traders make money consistently month after month after month, but then have one bad trade that could wipe out all their profits. Neither strategy is better or worse then the other. It has more to do with what the trader is comfortable with. Some guys could never withstand the unbearable pain of watching their positions bleed month after month in the hopes of the big hit. While other traders would never be able to sleep at night with the possibility of a large move wiping them out. It all comes down to what you are comfortable with.

The same is true for tend following funds and arb funds and long/short equity funds. The trend following funds can offer several consecutive years of 40% to 80% returns. But then they can have periods with 2 to 4 years when their funds chop and churn.

I personally would not like be in a arb fund that gave me nice consistant 10% to 15% returns knowing that one fixed income spread that goes the wrong way and my fund is suddenly down 50% with no way to re-coup the losses. As for the long/short funds, I see no reason to invest in this group that offers nothing but mediocre returns even in it's best years.

So what is the real solution. Like everything else in life, it's probably good to spread your money out among all these classes. In other words, I don't think anyone puts all their money in any one class. Trend following funds allow one to put some of their assets in a class that in good years could offer "Google" type returns in a good year. I think this itself justifies the addition of a trend following fund in one's portfolio.

Will trends continue in the future? Of course they will. They have for 500 years. The harder it becomes to stay in the trend, the more reward there will be for those that do.
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Lights · Apr 3, 2006

T Boone Pickens made $1.5 billion following the oil trend.

Quote from marketsurfer:

i don't agree that the claim is outlandish.

he is refering to a specific hedge fund strategy known as "trend following", not long only mutual funds.

there are many strategies that no longer work in the markets--- the option arbs and witching plays come to mind first. trend following may just be another one of these strategies consigned to late night hucksters and the dustbin of history.

surfer
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