The problem is that they claim there is a simple edge that wont go away, this goes against the history of markets in which edges tend to routinely dissapear. If Tiger Woods says he is a great golfer and will continue to be Top 50 ranked till he is 60, that is one thing, I would believe that, I would take as evidence the fact that he was no1 for so long, this must mean he was born very talented. But if Joe Doe says hes got a special golf club and will be a Top 50 player till he is 60 while telling the entire world how to build and use that club, I would doubt that very much Now its possible that TF is like going long way OTM options to take advantage of fat tails like Taleb does, and this takes advantage of human nature desire for steady consistent profits while risking large losses but that is a possibility, which is why I would like to see TF returns being calculated in a biases free way, after all, there is no rule that says this human flaw edge cant be closed by large smart hedge funds making levered bets
Trend followers get the biggest edge when other people are short volatility - because at that point, risk is cheap, and TF's can pick up contracts with low risk entries or exits... and with less volatility/slippage on their positions. That is why, implicitly, "the flaw" that TF funds trade off of cannot go away, as long as people sell volatility. The only time the effect of being short volatility works against them is during a Market intervention where government positions the Market to work in favour of those short volatility. Unfortunately for trend followers, for a number of years, 2009 included, Market intervention has created something like a "synthetic trend" that a trend follower cannot easily enter into.
You are raising an intetresting question - which I was actually asking myself lately. In which case why bother doing trend following just buy these long way OTM options... I havent given it too much thought yet but I cant think of a clear obvious reason why not ie similarly you profit when large trends arise, volatility rises, your costs of trading are time premium (option route) vs losing trades + trade commissions on more frequent trading (TF route), your risks are well established (SL point for TF route, cost of option on option route)ty rises
Interesting introductory paper by E&R on the topic of ATM straddles http://www.estlander-roennlund.de/binaer_view.asp?BinaerNr=70 The area is quite well researched. Look for papers with the keywords "lookback straddles" and "managed futures".
As an FYI, I track some "Trend Following Wizards" monthly performance - which I publish every month on the blog: http://www.automated-trading-system.com/resources/trend-following-wizards-fund-performance/ waiting a bit longer for the January report as all CTAs report at slightly different times/delays If you are interested make sure you subscribe by RSS or by email [/end of shameless plug]
Nice, thanks for sharing. Quick thoughts -- you can take or leave -- 1, You show S'fund -25ish last year; IIRC their various funds were down anywhere from -25ish to -50ish (agreed, it's hard to track all their programs & products). 2, Might want to include Graham; he's ex-JWH and is much much bigger than JWH now.
re: Superfund, yes, this is the issue when CTAs offer multiple funds. I just have to pick one, in this case their traditional Superfund A I'll check Graham, thanks for pointing it out!
Mike Covel's site has some info - http://www.turtletrader.com/trader-ken-tropin.html http://www.trendfollowing.com/whitepaper/trendfollowing.pdf