Excess Returns, Ep. 12: The Pros and Cons of Trend Following

To say that the track record of market timers in general is dismal would be an understatement. There are so many factors that impact market returns that getting them all right is next to impossible. And even if you do, figuring out what is and is not already priced in can be an equally fruitless exercise. Despite the fact that forecasters have consistently failed to predict market turns, there is an option that can help… Read More

A “Protective” Alternative to the 60/40 Portfolio

By Justin Carbonneau (@JJCARBONNEAU) As this Forbes article points out, the 60/40 portfolio is “one of the most dominant investment approaches of our time”. This asset allocation is incredibly simple and it’s worked, but with U.S. stocks up nearly 350% off the 2009 lows and interest rates at historical lows, some investors are wondering if the 60/40 stock/bond portfolio has the same risk reduction and return benefits as it has in the past. This article… Read More

Computer Models are Bearish

An article in The Wall Street Journal reports that trend-following investment strategies have “gone from bullish to bearish to a degree not seen in a decade, according to an analysis of algorithms that buy or sell based on asset-price momentum.” The findings come from research by quant investment firm AlphaSimplex Group LLC “based on models that gauge the magnitude of price moves and perform like typical trend-following algorithms.” AlphaSimplex’s chief research strategist Kathryn Kaminski is… Read More

The Hedge Fund Strategy That Isn’t Working

Although tracking trends in financial markets was once a profitable investment strategy, the approach has fallen on hard times due to crowding. This according to an article in The Wall Street Journal. Trend-following is explained as follows: “If a security is going up—usually measured by a short-term moving average rising about a long-term moving average—then it’s time to buy. If it falls below, it’s time to sell.” During the 1990s and 2000s, the article reports, these… Read More

Trend-Following CTAs Suffer Performance Declines

Some quantitative investors are concerned that commodity trading advisers (CTAs) are “ill-equipped to handle a new era of steeper declines and sudden volatility spikes,” according to a recent article in Bloomberg. In February, the article asserts, the trend-following strategy employed by CTAs suffered the worst month since 2001 (according to a Societe General basket of the 20 largest managers), and in the beginning of March these funds fell by 0.7 percent. The article offers the… Read More

Some Ideas for Investing in a Low Return Environment

There is a very strong likelihood that returns for investors over the next decade will be significantly lower than what we have seen in the past ten years. With the trailing ten-year return of the S&P 500 at around 10% and the ten-year return of a 50-50 stock and bond portfolio at a little less than 7%, investors have become accustomed to above average returns. But long-term data indicates that these ultra-strong returns are very… Read More

You Can’t Time The Market – But Many People Should

By Jack Forehand, CFA (@practicalquant) — There are few topics that are more controversial in the stock market than market timing. Most long-term investors will tell you that market timing is impossible. Given that in order to time the market, you not only need to know when to get out, but also when to get back in, you can see why they think that. And on top of that, many market declines are just corrections… Read More