The Economist had an article on trend-following managed futures managers which was not very appealing. The thesis is simple, the poor performance one the last three years is a direct result of the markets being controlled by central banks and politicians who want calmness. With markets in hibernation, there are no trends to exploit. Hence, no returns.
If you look at the volatility of the major asset classes, you will not find any dispute to this fact. Commodity volatility is near 10 year lows. Bond volatility had spike during the "taper talk" but is not down to low levels. Stock volatility is low as measured by the VIXX index. Foreign exchange volatility is also low. If you are a trend-follower, you need market moves. If no market moves or range, it is hard to make a profit and run big portfolios. Traders will have to move to shorter horizons for trading when volatility is lower, but it is much harder to make money consistently with fast reading. That is especially true if the strategy has a lot of money to invest.
The next question is who or what is causing the low volatility. Well, if central banks are flooding the market with liquidity to keep short rates low and stable, there will not be a lot of volatility in the markets. The discount factor for any market that is driven by a present value calculation will have lower volatility. This is especially true of the most active futures markets.
So, when will trend-following make some money? My guess is that 2014 will be a better year given the choice of opportunities. If there is more growth, there will be some good opportunities to gain from the short side of bond trading. If there is a failure of growth, we will see another strong bond rally as the talk of taper is cut. A similar bipolar story will apply to foreign exchange and stock indices. It is easy to say that trend-followers can make money in either up or down markets; however, there is more likelihood markets being on a cusp with respect to growth.
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