“Managed futures do really, really well in a regime shift, Regime shifts seem obvious in hindsight, but they’re very hard to manage.” - Andrew Beer, managing member of Dynamic Beta Investments (WSJ 12/14/22)
This is a broader variation on the "crisis alpha" story. It is not a crisis that creates opportunity for managed futures and trend-following but the switching between one regime and another. A more violent and pronounced the transition will cause more market dislocations that will lead to trends. Of course, we need to define a regime, but works has been done in this area.
The usual regime identification approach is to think about the economy being divided into four states or regimes: expansion, contraction, recession, recovery. Research has found that alternative risk premium as well as sector behave differently across the business cycle based on these regimes. The same can be done for trend-following. There is little doubt that during a recession trend-following will do better given the diversification of opportunities and the ability to go short.
Regime transitions or shifts will cause capital to move between asset classes which cause price adjustments and trend opportunities. A business cycle recovery will move capital form safe to risk asset. The opposite will occur during a contraction. A key is that when there are regime transitions there will also be higher uncertainty. Periods of heightened uncertainty will cause investors to slow decisions which will likely result in trends. Holding a diverse asset set increases the trend opportunities.
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