Hi everyone, I have been studying and back-testing trend following strategies for a couple of years and is about to go live after much research, testing, and preparations. Would be great to chat with fellow traders looking to share their experience trading similar strategies, or are in the early stages of setting up their own hedge fund or CTA. Happy to share some elements of our strategy too: Our backtested strategy suggests we are able to generate 25% CAGR over the last 30 years. With a maximum drawdown of 47% and average drawdowns of 9%. Win rate of 38%. This is a loosely optimized strategy. When we scramble the system variables, the less optimal strategies can still manage a CAGR of 16%-18%. Please feel free to comment. Cheers, Andy
I used to work for a large CTA, AHL, so I might be able to help. The stats sound plausible (such a refreshing change on ET). What's your target annualised volatility? Looking at your drawdown you should probably cut the risk by one third, or one half, to get something more in line with typical investor preference. GAT
Trend following is a commodity, most institutional investors have access to what you describe for 0.4% / 0% and your competitors do the same returns but already have a few billions in aum, making the upside for your potential clients very limited. The only way you can grab some investors attention is if you have some shorter term alpha to increase the Sharpe a little and be more aggressive on the fresh As GAT says the numbers make sense, that's roughly what you see elsewhere... including at AHL huh
Eeek - a 47% drawdown and you have investors puking out. Not to mention the 100% gain you need to ever get to high ground again which is something not many can do - it can take years. Running shorter duration strategies such as momo along with trend following can smooth out the equity curve volatility. It is what most newer funds are doing these days.
Really appreciate all the comments here. I have explored ways to cut drawdowns and volatility and the most common methods I have come across includes diversifying across more markets or combining strategies such as mean reversion strategies. The reason we couldnt do that at this stage is because of capital. In fact we trade fractional CFDs because we couldnt size our positions properly with futures contracts. So this is something we will aim for as we grow. As for returns, we intentionally target a CAGR of 25% as many trend followers in the market tend to give below 20% returns. So its a conscious decision to suffer deeper drawdowns and focus on generating stronger returns.
Agree. It seems most investors are obsessed with short term performance these days. Tough world for trend followers given the poor performance for this strategy in recent years. But we believe in the strategy, we are not aiming to run billions in AUM, we are targeting investors willing to be more passive with their investment.
Generally, the systems generating lower returns also came with smaller drawdowns. At 18% CAGR, maxDD is 30% AvgDD is 6%. So its a conscious decision by us to accept a max DD of 47%, which is close to what the S&P500 gives too, but with returns at 25% CAGR.
Thanks for sharing GAT. Your experience with AHL and systematic strategies certainly will be very helpful. I see you have published a book too, I will definitely give that a read.