Every failed mechanical system suggest there should have another profitable one, I.e. a failed trend follower system suggest there should have a successful counter trend system. Every system have payout and payback time, instead of sucking in DD, another way is to try to timing the payout and payback time, hold and fold accordingly, I.e. running several different type of system at the same time, and score their performance, if trend follower starts to fall, maybe it is the time to fold, if all trend follower system failed , maybe it is the time to pick it up again, in this case use other systems as leading indicator of your system, it starts to become common practices, am I right? Rotation your method, common sense can go a long way, I.e. for stock market, last year a trend follower method can be used, but this year, based on fundamental, and market behavior, it appears to be a volatile market( market move in a wide range fast and slow), so a volatility method can be used instead, or use it as a hedge., just some random thought, I can be totally wrong.
I don't know the answers to those really good questions raised by Pabst, but i would challenge anyone to find a single example of high leverage and outsized returns, not just good returns but terrifically good returns, where true staying power has been demonstrated. From my own observations it would seem that anytime you have big-time leverage combined with monstrous returns its time to cash in your chips, because tomorrow you won't be so lucky. Is there any reason to think that one can violate the risk-reward correlation using a mechanical system?
Quite so. Even then, although the methods seem to be easy to replicate, it's not quite so easy in practice. But that's another discussion.
Violating the risk-reward relationship is not the same of sustainable high leverage and outsized returns. The former is attainable, the latter clearly not.
Guys, Running hedge fund is a very competitive business nowadays. In old days, the investors will stick to their trusted fund manager in BOTH good times and bad. Now, if a fund is not up for the year, many simply will pull out of the fund. Causing those who stayed with the fund with adverse effects if open positions are held. That alone, put infinite amount of stress on fund managers to perform, and sometimes, violating their own risk management rules, to get by. I am not trying to say that is the right thing to do. I am saying it is this kind of investors driving the industry now. Sad, but true.