Despite evidence that the strategy isn’t working today, investors have plowed $300 billion into hedge funds using “trend-following.” Laurence Fletcher writes about the phenomenon at The Wall Street Journal:
Performance among the roughly $300 billion in hedge funds that largely use so-called trend-following strategies has been abysmal. An investor buying into these funds at the start of 2011, for instance, and holding through July this year would have lost 3.4% on average, according to HFR. Over the same period the S&P 500 is up 124%.
“It’s like a lot of industries,” said Matthew Beddall, founder of investment firm Havelock London. “As it’s been successful more people have got involved. Now you can buy a book on Amazon on how to code trend-following.”
Trend-following is a simple concept with complex execution. The underlying idea is relatively straightforward: If a security is going up—usually measured by a short-term moving average rising above a long-term moving average—then it’s time to buy. If it falls below, it’s time to sell. Funds employ armies of Ph.D. scientists to work out exactly when a price move becomes a trend.
Investors have followed trends for centuries. British economist David Ricardo, who amassed a fortune trading markets 200 years ago, was known for cutting his losing positions and running his winners. Trend-following took off as a hedge-fund strategy in the 1980s, when commodities brokers automated trading with computers to look for market patterns.
These funds chalked up double-digit gains during the 1990s and 2000s. And they were one of the few hedge-fund strategies to make money in 2008’s market slump. This performance led pensions and other hedge-fund investors to pour in money.
The strategy has failed to deliver in recent market falls. In January, many such funds made big gains as markets soared, only to lose them and more during February’s volatility-driven selloff.
Read more here.
