Trend-following returns - It is all about macro volatility

The big trend-following strategy question is whether the strong performance of the last year can continue in 2023. The answer is yes for three reasons. One, volatility has been high and will continue to be high given the current economic uncertainty. Two, the current economic environment is more the norm versus the calm post-GFC period. See "Trend-Following: Why Now? A Macro Perspective." Three, trend strategies go both long and short and can reverse positions if there is a change in market direction.

The 2010-2020 was the lost decade for trend-following not because there was anything wrong with the strategy but because the macro environment was so stable. The stability paid handsomely to those who held a 60/40 stock/bond portfolio. If there are no major changes in macro fundamentals, there is little reason for prices to see extended trends. However, when there is strong fundamental volatility, it is likely to persist.

The combination of constraints on central bank policy choices, higher inflation even if dampened, a looming global recession, geopolitical uncertainty, and global economic uncoupling, we are more likely to see high market and macro uncertainty. 

The actual performance over the next 12 months given a strong prior 12 months is not significantly different from the median 12-month return. Returns likely be lower in 2023, but the chance of a major reversal or drawdown is not likely. For example, commodity prices moved off their March highs and trend-followers were able to rotate their risk exposures to the short-side and generate returns in other asset classes. This type of position rotating is likely to occur again next year.